-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FP/KSHkCsxE3MmgjUN5vyD4jkUDpDllQwwKE2+lb0BUARuL4pc++DpiTnogy7VvW iQvBZAqeQf9Couad3hEBiQ== 0001017062-98-001921.txt : 19980828 0001017062-98-001921.hdr.sgml : 19980828 ACCESSION NUMBER: 0001017062-98-001921 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980826 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIER LASER SYSTEMS INC CENTRAL INDEX KEY: 0000878543 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330476284 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-14013 FILM NUMBER: 98698590 BUSINESS ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 7148590656 MAIL ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92677 10-K/A 1 FORM 10-K/A (AMEND #1) - YEAR ENDED MARCH 31, 1998 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-K/A Amendment No. 1 (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 1998. -------------- [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____________ to _____________. Commission file number 0-25242 -------------------------------- PREMIER LASER SYSTEMS, INC. (Exact name of registrant as specified in its charter) California 33-0472684 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 Morgan, Irvine, California 92618 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): (714) 859-0656 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock and Class B Warrants ----------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act or 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [_] No [X] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [_] The aggregate market value of the registrant's voting stock held by nonaffiliates was approximately $61,878,491 on June 24, 1998, based upon the closing sale price of such stock on May 22, 1998. Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of June 24, 1998: Class A Common Stock: 14,903,906 Shares Class E-1 Common Stock: 1,257,499 Shares Class E-2 Common Stock: 1,257,499 Shares Documents incorporated by reference. List hereunder the following documents if incorporated by reference, and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933: None PART I Item 1. Business. This Annual Report on Form 10-K contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. Such forward-looking statements are principally contained in the sections "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and include, without limitation, the Company's expectation and estimates as to the Company's business operations, including the introduction of new products, and future financial performance, including growth in revenues and net income and cash flows. In addition, in those and other portions of this Annual Report, the words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company's management, with respect to future events and are subject to certain risks, uncertainties and assumptions, including the risk factors described in this Annual Report. Overview Premier Laser Systems, Inc. ("Premier") develops, manufactures and markets several lines of proprietary medical lasers, fiberoptic delivery systems and associated products for a variety of dental, ophthalmic and surgical applications. In addition, through its wholly owned subsidiary, EyeSys Technologies, Inc., a Delaware corporation, ("EyeSys"), Premier develops, manufactures and markets corneal topography (diagnostic imaging) systems. Premier's majority-owned Data.Site joint venture ("Data.Site") assists physicians and researchers with ophthalmic data collection and outcomes analysis for specific procedures. Premier's majority owned subsidiary, Ophthalmic Imaging Systems, Inc., a California corporation ("OIS") is engaged in the business of designing, developing, manufacturing and marketing digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. When referred to in the following discussion, the "Company" shall include Premier Eyesys, Data.Site and OIS. Premier commenced operations in August 1991 after acquiring substantially all of the assets of Pfizer Laser, a division of Pfizer Hospital Products Group ("Pfizer HPG") which is a wholly-owned subsidiary of Pfizer, Inc. The Company acquired from Proclosure, Inc. ("Proclosure") certain technology, assets and proprietary rights relating to a laser system for tissue fusion in 1993, and completed its initial public offering of securities in 1994. In 1997, it formed a joint venture, named "Data.Site," with Kansas City-based Refractive Surgical Services for the purpose of providing data collection and outcomes analysis. In September 1997, Premier acquired EyeSys in exchange for cash and securities. Premier acquired a majority of the outstanding common stock of OIS in several transactions commencing in October 1997 and ending in February 1998. Premier entered into a Stock Purchase Agreement, dated February 25, 1998, pursuant to which it agreed, subject to certain conditions, to commence an exchange offer to acquire all of the outstanding common stock of OIS not owned by Premier. This Stock Purchase Agreement was terminated as of August 21, 1998. In connection with this termination, Premier may be liable to pay OIS a $500,000 break-up fee, which could be satisfied by the reduction of indebtedness of OIS to Premier which arose after March 31, 1998. In addition, in purchasing 51% of OIS' outstanding stock, Premier entered into an agreement with one of OIS' selling shareholders which contemplates that Premier's purchase of approximately 10% of OIS' outstanding shares will be rescinded if Premier does not complete the exchange offer. If the rescission is implemented, Premier will own less than a majority of the outstanding shares of OIS and would no longer include the financial performance of OIS on a consolidated basis. In addition, as part of the rescission, Premier would receive approximately $730,000 in cash. The parties are currently negotiating various issues relating to the termination of the Purchase Agreement and their future business relationship. Laser Business The Company's lasers and related products use the controlled application of thermal, acoustic and optical energy to allow the physician or dentist to perform selected minimally invasive procedures which in some cases, compared to conventional techniques not involving the use of lasers, vaporize or sever tissue with minimal blood loss and scarring, increase patient comfort and reduce patient treatment time and treatment costs. 2 The Company currently markets certain of these lasers for dentistry, ophthalmology and surgery. In its laser business, the Company participates in three market segments: dentistry, ophthalmology and surgery. The Company's innovations include: the first laser cleared for use on hard tissue (teeth) in dentistry, the first diode laser in dentistry, the first laser in clinical trials for cataract emulsification, the first Erbium:YAG laser for ablation of skin and the first laser in clinical trials for tissue melding. Although the Company has received more than 100 clearances from the United States Food and Drug Administration (the "FDA") in multiple specialty areas to market its laser products for a variety of medical applications, due to limited financial resources the Company has initially focused its marketing efforts on dental lasers which the Company believes have the most promise for commercial success. The Company initiated marketing efforts in ophthalmology in calendar 1997. The level of future marketing efforts is partially dependent upon the receipt of future financing. As resources permit, the Company plans to commence marketing efforts with respect to other medical applications which it believes may also be commercially viable. Corneal Topography Business Eyesys designs, develops and markets a line of noninvasive corneal topography systems for use by ophthalmologists and optometrists in surgical planning and evaluation, diagnosis of corneal pathologies and contact lens fitting. Founded in 1986, Eyesys has installed more than 3,500 systems. The Eyesys System 2000 combines proprietary hardware used for capturing an image and a personal computer to control the hardware and to run the software. The output of the Eyesys System 2000 is a color-coded map of the shape and curvature of the human cornea that vision care professionals can easily interpret and utilize for treatments such as refractive and cataract surgery and corneal transplants, for diagnosis of astigmatisms and corneal pathology, and for contact lens fitting and custom lens manufacturing. Ocular Imaging Business OIS, which commenced business in 1986, is engaged in the business of designing, developing, manufacturing, and marketing digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. Since its inception, OIS products have addressed primarily the needs of the ophthalmic fluorescein angiography market, and more recently the indocyanine green market. The current flagship products in the OIS's angiography line are its digital imaging systems, the WinStation 1024(TM) and WinStation 640(TM). These WinStation products are targeted primarily at retinal specialists and general ophthalmologists. OIS's WinStation systems (640 and 1024 resolution) are primarily used by ophthalmologists to perform a diagnostic test procedure known as fluorescein angiography. This procedure is used to diagnose and monitor pathology and provide important information in making treatment decisions. Fluorescein angiography is performed by injecting a fluorescent dye in the bloodstream. As the dye circulates through the blood vessels of the eye, the WinStation system connected to a fundus camera takes detailed images of the patient's retina. Quite often these images provide a "road map" for laser treatment. OIS has experienced operating losses for each fiscal year since its initial public offering in 1992. OIS expects to continue to incur operating losses for the foreseeable future and while a goal of the combined ophthalmic businesses is to achieve profitability through consolidation, there can be no assurance that OIS will be able to achieve or sustain significant revenues or profitability in the future. 3 Market Overview Dental and Periodontal Laser Market The current market for laser equipment in dental procedures is comprised of hard and soft tissue procedures, composite curing and teeth whitening. Hard Tissue (Cavity Preparation). Potential dental laser applications for hard tissue procedures (i.e., procedures on teeth) include pit and fissure sealing, etching, caries removal and cavity preparation. Based on user feedback from the Company's clinical sites, the Company believes that the use of a laser in dentistry reduces the pain associated with various traditional procedures performed with a dental drill. On May 7, 1997, the Company's Er:YAG laser was cleared to market for tooth etching, caries removal and cavity preparation. This laser was the first to be cleared by the FDA for such procedures. The Company commenced marketing of the Er:YAG laser for these procedures shortly after receipt of FDA clearance. Soft Tissue. The dental laser can be used for certain periodontal procedures and to treat early gum disease, postponing or in some cases eliminating the need for conventional periodontal surgery and providing the opportunity for overall cost savings. While the Company has clearance to market six lasers (including the Aurora diode laser and Centauri Er:YAG laser) for soft tissue dental procedures, the Company focuses its marketing efforts on its Aurora diode laser in this area. Composite Curing. Composites are rapidly replacing amalgams (gold and silver) as the material of choice for restoration of cavities, because they more closely match the color of teeth and because amalgams have drawn increasing worldwide concern over safety due to the toxic gases which may be released when the amalgams are removed from teeth. Composite fillings are typically cured using a curing light which provides a broad spectrum of wavelengths. The use of the argon laser for this application has been shown to frequently result in a stronger restoration than composites cured by traditional curing lights. The Company's argon lasers can also be used to cure the resins used in placing veneers or bond orthodontic brackets. The Company's Arago and MOD argon lasers have received FDA clearance for use in these applications. Teeth Whitening. A large number of dentists use light accelerated bleaching materials for teeth whitening. These materials are traditionally applied at night over a six to eight week period to whiten a patient's teeth while he or she sleeps. Lasers have been shown to facilitate the use of these light sensitive materials in the dentist's office by accelerating this process and resulting in an approximately three shade change in less than one hour. The Company's MOD and Arago lasers have been cleared to market for this procedure. Cavity Prevention. The Company is currently conducting research and is initiating clinical trials to use its lasers for cavity prevention applications. The Company's clinical trials are at an early stage and there can be no assurances that FDA clearance will be obtained for these applications. Ophthalmic Laser Market Laser systems have been used for the treatment of eye disorders for many years and are widely accepted in the ophthalmic community. The original and most widely accepted use of laser systems in ophthalmology has been for posterior capsulotomy. The Company does not promote its lasers for this market, which it believes is approaching saturation, but instead focuses on intraocular refractive and aesthetic procedures including anterior capsulotomy, cataract removal, glaucoma treatment, corneal sculpting and occuloplastic or aesthetic procedures. The Company has developed the Centauri Er:YAG laser which is capable of 4 performing all of these procedures, which are typically performed by several different types of medical lasers. To date, however, the Centauri laser has only been cleared for use in anterior capsulotomies and certain cosmetic procedures. Cataract Removal Procedures. The Company believes that no medical lasers have been approved to date for cataract extraction procedures, and that medical lasers may result in less trauma and inflammation than traditional surgical methods, providing more comfort to the patient. The Company's Centauri Er:YAG laser has been cleared to market for anterior capsulotomy, a procedure which opens the capsule of the eye prior to the removal of the cataract. The Company has also completed Phase II clinical trials on the Centauri laser for lens emulsification (the removal of the cataract itself), as an alternative to phacoemulsification (the breakup of the cataract by ultrasonic energy). The Company believes that this patented technology for use in lens emulsification may provide an easier and safer method of cataract removal. Treatment of Glaucoma. Glaucoma, a disease of the eye characterized by increased intraocular pressure within the eyeball and progressive loss of vision, has traditionally been treated with drug therapy. When drug therapy is ineffective, periodic invasive surgery may be required. In these cases, lasers may be used to open the sclera and relieve pressure in the eye. This procedure, which may be repeated periodically, can be performed under local anesthesia with a self closing incision on an outpatient basis. The Company is currently conducting clinical trials prior to seeking clearance to market its Centauri Er:YAG laser for this procedure. If clearance is obtained, concerning which there can be no assurance, the Company's Er:YAG laser could provide a viable alternative to the traditional invasive surgical procedures. Corneal Sculpting. The Company believes that the recent approval of excimer lasers has resulted in greater acceptance and recognition of laser refractive surgery in the ophthalmic market. Medical lasers may be used for corneal sculpting (photorefractive keratectomy), a procedure in which the laser is used to sculpt the cornea of the eye to a desired curvature to correct the myopia, hyperopia or astigmatism. The Company plans to seek approval to market the Centauri laser for corneal sculpting and has initiated studies in preparation for regulatory submittal for this application. No assurance can be given, however, that approval will be given for this application. Aesthetic Surgical Procedures. The Company has received clearance for the use of its lasers in certain aesthetic procedures such as skin resurfacing and eyelid surgery. It plans to begin marketing certain of these products for aesthetic applications during the 1999 fiscal year. Surgical Laser Market Laser systems have been approved for and are currently being used in a variety of surgical applications including orthopedics, neurosurgery, urology, gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic surgery. Although the Company's products are cleared to market in a number of specialty areas within the surgical market, the Company has specifically targeted tissue melding (tissue fusion) and aesthetic applications within the surgical market. Tissue Melding. The Company believes a significant number of wound closure procedures may be addressed with surgical lasers in conjunction with or independent of traditional sutures or staples. The clinically demonstrated benefits of the use of surgical lasers for tissue melding, as compared to sutures and staples, include fluid-static seals, immediate strength of the closure and reduced surgical time. The Company and its strategic partner have conducted animal tests to support IDE submittals for the use of the Company's Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts, and are currently conducting clinical studies for skin and hypospadias. The Company has also completed clinical trials for vasovasotomy (reversal of vasectomies) which demonstrated a success rate of approximately 89%. The Company is also beginning Phase I clinical trials for the treatment of hypospadias, the lengthening of the urethra to the end of the penis in infants, in which it is anticipated that the laser's fluid-static seal may minimize post- surgical complications such as the leakage of urine which results in secondary surgical procedures. The Company has clearance for Phase II clinical trials for skin closure 5 following mastectomies and eyelid surgery at five clinical sites. Artery and vein anastomosis is being tested in animals by the Company's strategic partner in Japan in preparation for clinical studies. Aesthetic Surgical Procedures. The market for aesthetic surgery is growing rapidly worldwide. The Company has a number of approvals for lasers to be used in aesthetic applications and will devote further efforts in the future to entering into and capitalizing on this market. The Company has regulatory clearance to market its products for a variety of additional applications, including in urology, orthopedics, gynecology, gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In areas where the Company's technology is not being fully utilized, the Company may seek agreements to supply its products under private label for other manufacturers or may enter into strategic alliances to develop and market the Company's lasers for other applications. Corneal Topography Market Because of the importance of the cornea to visual performance, virtually all ophthalmologists and optometrists have historically used a measuring instrument known as a keratometer to quantify corneal curvature. This instrument obtains four measurement points reflected on a 3 millimeter diameter circle on the cornea. Because of the small number of data points and other limitations of this instrument, it cannot accurately measure asymmetrical curvatures. This is clinically significant because, according to clinical studies, more than one out of every three people suffers from asymmetric refractive errors. While in the past the limitations of keratometry were accepted since only symmetrical refractive errors were correctable with glasses or contact lenses, this is no longer the case. Advanced contact lens designs and refractive surgical procedures provide clinicians and patients with a variety of optical solutions, even for asymmetrical errors, and require more accurate information over a greater area of the cornea. Applications of corneal topography technology include: Refractive Surgery. More than 140 million Americans suffer from refractive errors requiring them to wear glasses or contact lenses. Every year there are an estimated 65-70 million patient visits to ophthalmologists and optometrists in the U.S. which result in the purchase of over 60 million eyeglasses and contact lenses. It is also estimated that over 40% of the world's population suffers from refractive errors significant enough to require some form of correction. Many industry analysts believe that emerging refractive surgery techniques will be attractive to a significant number of these patients. Corneal topography has important applications in selecting the appropriate procedure for each patient, preoperative surgical planning, postoperative evaluation and patient follow-up. Cataract Surgery. Cataract surgery is a procedure involving removal of an opacified natural crystalline lens, primarily in elderly patients. The evacuated lens is replaced with an implant called an intraocular lens ("IOL"). Corneal topography can help the surgeon improve pre-surgical planning, assess and correct surgically induced astigmatism (which is the most frequent complication caused by IOL surgery), potentially improve the calculation of the implanted IOL power, and support combination cataract/refractive surgical procedures. Corneal Transplants. Corneal topography provides important information for other surgical procedures, including post operative evaluation of corneal transplants. An increasing number of corneal transplants are performed using corneal topography to provide for improved surgical outcomes by allowing the practitioner to evaluate surgical technique and adjust postoperative treatment. EyeSys estimates that approximately 50,000 corneal transplants are performed in the U.S. each year. Diagnosis of Astigmatism and Corneal Pathology. Corneal topography is a valuable technology for the analysis and diagnosis of astigmatism and various corneal pathologies, including keratoconus, pellucid marginal degeneration and contact lens-induced corneal warpage. Because of the limitations of 6 keratometers, many of these patients have pathology that cannot be accurately measured by keratometry, the most widely used method of measuring corneal curvature. Contact Lens Fitting and Custom Lens Manufacturing. Corneal topography has several applications in contact lens fitting and manufacturing, including (i) identification of irregular and hard-to-fit corneas, (ii) detection of contact lens induced corneal warpage, (iii) computerized selection of lenses and evaluation of fit, (iv) custom designed contact lenses, and (v) verification of lens parameters. The Company believes that the combination of an affordable corneal topography system and applications software targeted at improving contact lens fitting is particularly attractive to optometrists and general ophthalmologists who currently fit contact lenses. The Company has developed a software application, Pro-Fit, which utilizes the available corneal topography data to recommend lenses which can be selected from a comprehensive worldwide database of rigid gas permeable (RGP or "hard") and soft lenses. Clinical testing of Pro-Fit shows that the use of this application software can yield dispensable RGP prescriptions over 90% of the time providing for dramatic improvements in the quality of contact lens fits and can result in a significant saving of clinicians' time. Traditional RGP lens fitting, based on keratometer readings, is often a trial and error process, consuming clinician or staff time and can be uncomfortable for patients. Ocular Imaging Systems Market There are approximately 18,000 ophthalmologists in the United States and 28,000 ophthalmologists practicing medicine in countries outside the United States. This group has been traditionally divided into two major groups: those who specialize on the anterior segment (front of the eye), and those who specialize on the posterior segment (back of the eye). Within these groups there are several sub-specialties including medical retina, retina and vitreous, glaucoma, neuro, plastics, pediatric, cataract, cornea and refractive surgery. OIS's WinStation products are targeted primarily at the retina specialist and general ophthalmologist. The WinStation market consists of current fundus camera owners and anticipated purchasers of fundus cameras suitable for interfacing with the OIS's digital imaging system products. A fundus camera is a camera that produces photographs of the retina of the eye. Presently there are over 8,500 mydriatic fundus cameras in clinical use in the United States with an equal number in the international market. New fundus camera sales fluctuate between 500 and 1,000 units per year. Of the total number of fundus cameras worldwide, approximately 12,000 are suitable to be interfaced with OIS digital imaging systems. Currently there are six manufacturers of fundus cameras producing a total of 17 models. OIS has successfully designed optical and electronic interfaces to each of these cameras. The primary target market for digital angiography systems is retinal specialists who number approximately 3,000 in the U.S. For the past two years OIS digital imaging system sales have been driven in this segment to a large extent by indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test procedure which is yielding new clinically significant information that is helpful in the treatment of patients with macular degeneration (a leading cause of blindness afflicting over 13 million people in the U.S.). ICG angiography is a dye procedure that can only be performed using a digital imaging system. While only used for 10-20% of patient angiography, it has been the catalyst to digital imaging system purchases. Competition is intense in the retinal community and those practices without ICG capability are losing referral business from general ophthalmologists. The Company expects the demand for digital angiography to continue as it is becoming a standard of care. Surgical Outcomes Market Data.Site surgical outcomes software is targeted to approximately 18,000 ophthalmologists in the United States who desire to monitor and improve their surgical outcomes. Accessible through the internet, Data.Site is expanding into the international marketplace and other clinical specialties. The Data.Site software is currently being expanded to perform in conjunction with other electronic medical records systems. 7 Products Laser Products The use of laser technology in dentistry, ophthalmology and surgery involves the controlled application of laser light to hard or soft tissue causing an optical, thermal, acoustic or plasma interaction with the tissue. When applied to tissue, the laser light is partially absorbed. This process of absorption converts the light to heat, which in turn alters the state of the tissue. The degree of tissue absorption varies with the choice of wavelength and is an important variable in the application of laser technology in treating various tissues. The laser energy can also form a gas bubble in a water medium which provides an acoustic cutting effect as it bursts. The Company often uses its proprietary delivery systems to control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting effects. These delivery systems include flexible fiberoptics, waveguides, articulated arms and micromanipulators or scanners which are used on a disposable or limited reuse basis, and which the Company expects will provide a recurring revenue stream for the Company. The Company's strategy is to target specific applications in the dental, ophthalmic and surgical markets, where management believes that the Company's technology and products have competitive strengths. The Company's line of portable lasers are specifically designed for use in outpatient surgical centers and medical offices. The Company believes that its lasers are also well suited for the international market, particularly in facilities with many surgical suites where easy transportation of equipment is necessary. By employing techniques developed in the computer industry, the Company has designed a laser system that (i) is modularly designed and uses similar components for multiple laser systems thereby reducing their overall cost, (ii) allows for efficient and inexpensive repair by replacing a board or assembly in the field or through the mail, reducing the need for a field service force, and (iii) can be easily moved from the office to surgical centers because of its compact size and limited voltage requirements. The Company's Er:YAG lasers are currently priced from $39,000 to $126,000 and its Nd:YAG lasers are currently priced from $25,000 to $80,000. The Company's diode lasers are currently priced from $22,000 to $35,000 and its argon lasers are priced from $5,500 to $22,000. The prices of lasers within these ranges depend upon each model's power capability and the features offered. The following table presents in summary form, the Company's principal lasers and delivery systems, the principal applications for which the Company intends to use them, and the FDA status of such products.
Product Medical Application FDA Regulatory Status - -------------------- ------------------------------------------------ -------------------------- Centauri (Er:YAG) Dental--Soft Tissue............................. Cleared to market Dental--Hard Tissue............................. Cleared to market Ophthalmology (e.g. Anterior Capsulotomy) Cleared to market Ab-externo and Ab-interno Sclerostomy, Laser Lens Emulsification............................. Corneal Sculpting............................... Preclinical animal studies General Surgery, Neurosurgery, Orthopedics, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery............ Cleared to market Pegasus (Nd:YAG Dental--Soft Tissue............................. Cleared to Market 20W) Polaris (1.32(units) Tissue Melding.................................. Clinical trials Nd:YAG)
8
Product Medical Application FDA Regulatory Status - -------------------- ------------------------------------------------ -------------------------- General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Cleared to market Surgery......................................... Aurora (diode) Dental--Soft Tissue............................. Cleared to market Dental and General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Dermatology, Plastic Surgery, Podiatry, Neurosurgery, Gynecology, Pulmonary Surgery and Oral Surgery.. Cleared to market MOD and Arago Dental--Composite Curing........................ Cleared to market (argon) Dental--Teeth Whitening......................... Cleared to market
Centauri ER:YAG Laser. The Company's Centauri Er:YAG laser is a portable Er:YAG pulsed solid state laser which generates high frequencies (up to 30Hz) at relatively low peak power. These high frequencies allow faster cutting at lower energies. The 2.9 micron wavelength of the Er:YAG is highly absorbed by water, producing a cut similar to the scalpel. The Er:YAG wavelength is delivered through a fiber optic delivery system which enables the beams to be focused and angled. These fiberoptic catheters are difficult to produce and the Company has invested heavily in the technology to develop fibers which can handle adequate power. The Company had experienced difficulties in securing a consistent and reliable source for these fibers in the past. It has procured two sources for these fibers. See "--Manufacturing and Materials" and "Legal Proceedings." The Company's Centauri Er:YAG laser has many potential applications in different medical specialties, including cutting hard tissue such as bone and teeth, which could replace or minimize the use of noisy, high speed dental hand drills, and removing ocular structures or performing microsurgery with minimal thermal damage. Although until recently marketed only for soft tissue dental procedures and anterior capsulotomy, the Centauri laser also has received FDA clearance to market for hard tissue dental procedures. No assurance can be given, however, that the use of the Er:YAG laser for hard and soft tissue procedures will become a widely accepted practice in dentistry. This laser also has received FDA clearances to market for hemostasis, excision and vaporization of tissues in ophthalmology, general surgery, neurosurgery, orthopedics, gastroenterology, urology, gynecology and oral surgery. See "--Government Regulation." The Centauri laser is effective in cataract ophthalmic procedures because its wavelength is at the peak of the water absorption spectrum and water comprises greater than sixty percent of ophthalmic tissues. Therefore, the Centauri laser can emulsify cataracts, surgically excise tissue in the treatment of glaucoma and can precisely remove layers of cornea similarly to an excimer laser. This system, which currently is cleared for anterior capsulotomy and other procedures in ophthalmology, is estimated to be available for approximately one-third the price of refractive excimer lasers currently on the market and requires substantially lower maintenance costs than excimer lasers (an estimated $10,000 per year as compared to approximately $70,000). In addition, the multipurpose Centauri Er:YAG laser is completely portable and does not emit any toxic gases or cause any potential mutagenic effect which may result from the use of the excimer laser. The Company has recently introduced what it believes to be the industry's first fully-integrated Er:YAG laser system for ophthalmic procedures. The new system incorporates the Centauri Er:YAG laser and provides the option of either a bi-manual or coaxial, uni-manual handpiece to accommodate an individual physician's technique. The Company has also demonstrated this system with an optional scanner for skin resurfacing. 9 While animal studies have been encouraging, there can be no assurance that the FDA will approve the use of the Company's Centauri laser for corneal sculpting, or that the laser will work effectively in clinical trials. Clinical trials are estimated to continue for two to five years before approval can be sought in the United States. There are several patents pending on this technology and application, although no assurances can be given that these patents will be approved or approved with the current claims. Polaris and Pegasus ND:YAG LASERS. The energy of Nd:YAG lasers is absorbed by blood in tissue and as a result these systems are the preferred lasers to limit bleeding during surgery and for procedures requiring fiberoptic delivery, such as laparoscopic surgery. The Nd:YAG fiberoptic delivery system allows the surgeon to perform surgery through small incisions, providing minimally invasive surgery to patients and usually reducing treatment costs and the length of hospital stays. The Company manufactures a variety of continuous wave solid state Nd:YAG lasers which are designed for use in dentistry and a number of medical specialties. The Company received its first FDA clearance to market a continuous wave Nd:YAG laser system for dental (soft tissue) applications and introduced its 20 watt dental Pegasus Nd:YAG laser in February 1992 (which has in large part been superseded by the Company's newer diode laser system). The Company also manufactures 40, 60 and 100 watt Pegasus Nd:YAG lasers which have FDA clearance to market for various applications and procedures in general surgery, urology, gastrointestinal procedures, pulmonary procedures, gastroenterology, gynecology and ophthalmology. These lasers also utilize the Company's disposable unique TouchTIPS, AngleTIPS and sculptured fibers. By using the Pegasus laser with TouchTIPS, the surgeon is allowed direct contact with tissue and the tactile feeling of the scalpel or other surgical instruments. The Company believes that the availability of these technologies permits the use of lower power laser systems (20W in dental, 40-60W in surgery). The Company holds the proprietary rights, including several patents, to manufacture and sell the Polaris laser, a 1.32 micron Nd:YAG laser (except in Japan, China and Taiwan), together with specialized software and delivery systems, for tissue melding. The Company is developing the Polaris laser for use in cosmetic skin closures, vascular surgeries and minimally invasive surgical procedures normally performed with sutures and staples. Although the use of the Polaris laser for tissue melding is still in the development stage, and no clearance for this application has been received, the Company believes that tissue melding offers clinical advantages over traditional sutures and staples including fluid-static seals, immediate strength of the closure and reduced surgical time. Aurora Diode Laser. The Aurora diode laser is the Company's first semiconductor laser and is the first truly portable diode laser designed for dentistry. The Aurora diode laser replaces the 20 watt Pegasus laser for periodontal procedures, and is approximately one-fourth the size and one-half of the cost of that system. The diode wavelength is absorbed by blood and pigmentation and has been cleared for use in multiple specialties such as general surgery, ophthalmology, urology and plastic surgery. The Aurora laser, which was introduced for soft tissue dental applications in February 1996, is designed to utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS and sculptured fibers, for soft tissue surgery with minimal bleeding or anesthesia. The dental laser can also be used to treat early stage gum disease, postponing or in some cases eliminating the need for periodontal surgery and providing the opportunity for overall cost savings. The Company believes the Aurora laser compares favorably with competitive products including pulsed Nd:YAG lasers, which cannot produce the required laser settings for use with TouchTIPs, or in the new technique for the treatment of periodontal disease, as well as with CO(2) lasers (which cannot be delivered through a fiber), and argon lasers (which tend to be slower in cutting and may produce charring). 10 Arago and MOD Argon Lasers. The Arago and the MOD (Multi Operatory Dentalaser) are gas lasers which have been cleared to market in dentistry to accelerate the composite curing process. Composites are rapidly replacing amalgams (gold and silver) as the material of choice for the restoration of cavities. The argon wavelength penetrates through the composite and has been shown to frequently result in a stronger restoration than composites cured by traditional curing lights. The Company's argon lasers can also be used to cure the resins used in placing veneers or bonding orthodontic brackets. The argon laser can also be used to enhance teeth whitening procedures using light activated bleaching materials which have traditionally been applied at night over a six to eight week period. Lasers have been shown to facilitate the use of these light activated products in a dentist's office by accelerating this process and resulting in an approximately three shade change in less than one hour. The argon laser has been cleared to market for this procedure. No assurance may be given that the use of the argon laser for teeth whitening will become a widely accepted practice in the dental industry. The Company plans to bundle its lasers with light activated whitening materials and co-market these products with the manufacturers of these materials. The Company is currently manufacturing the MOD lasers in-house. The Arago laser is currently being supplied by a third party manufacturer on behalf of the Company. Other Lasers. The Company has developed other solid state pulsed lasers including the Sirius .532 Nd:YAG laser, Orion Ho:YAG laser and the Arcturus alexandrite:YAG laser, and other applications for its existing lasers, but is not actively marketing these lasers at the present time. The following table sets forth in summary form certain additional lasers owned by the Company which are not currently marketed by the Company, and the principal applications for which the Company has clearance to market such lasers.
Product Medical Application FDA Regulatory Status - --------------------------------- -------------------------------------------- --------------------- Altair (CO\\2\\) and a CO\\2\\ Orthopedics General and Plastic Surgery, laser acquired from Pfizer HPG Dermatology, Podiatry Ear, Nose and Throat, Gynecology Pulmonary Procedures; Neurosurgery and Ophthalmology.............. Cleared to market Pegasus (Nd YAG) General Surgery, Urology, Gastrointestinal 40W/60W Procedures, Pulmonary Procedures, Gastroenterology, Gynecology and Cleared to market Ophthalmology............................... Pegasus (Nd:YAG) Oral, Arthroscopic and General Surgery, 100W Gastroenterology, Gastrointestinal and Genitourinary Procedures, Pulmonary Procedures, Gynecology, Neurosurgery and Cleared to market Ophthalmology............................... Sirius (.532(units) Nd:YAG) Dermatology, General and Plastic Surgery, Podiatry and Orthopedic Applications........ Cleared to market Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and Throat, Ophthalmology, Gastroenterology, Pulmonary Procedures and Urology............ Cleared to market Er:YAG/Nd:YAG Various specialties......................... Cleared to market (Combination)
11 Laser Delivery Systems and Disposable Products An integral part of any laser system is the means of delivering laser light to the target tissue. Delivery systems commonly employed in laser surgery include flexible fiberoptics, waveguides, articulated arms and micromanipulators. The Company's proprietary delivery systems control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting efforts. Flexible fibers are a preferred method of delivery for most clinical procedures, but until recently were only available for Nd:YAG and argon lasers. With the diode laser, coupling efficiency between the laser and fiber optic limits high powers being focused into small diameter fibers. Fibers for Erbium lasers are less reliable and durable than standard quartz fibers, which limits the number of procedures they may be used for. They are also significantly more expensive than quartz fibers. The end of a fiber may be shaped or used with a detachable tip to control the mechanism of laser/tissue interaction, to give a tactile feel, to provide certain mechanical effects and to angle or focus the laser beam. The Company has also been granted a perpetual paid-up license to manufacture, use and sell flexible waveguides to deliver CO(2) energy pursuant to the Assignment and Modification Agreement dated July 26, 1991 among the Company, Pfizer HPG and Medical Laser Technologies Limited. While each laser system marketed by the Company consists of a laser and an integral fiber, these fibers and other products, such as tubing sets, are used by surgeons on a disposable or limited reuse basis for each clinical procedure. The Company believes that expansion into this market could provide it with a recurring revenue stream. The Company manufactures a variety of fiberoptic delivery systems, sculpted fiberoptic probes, optical tips (AngleTIPS and TouchTIPS), waveguides and catheters which are designed for single-patient use. The patented connectors and need for product sterility encourage the users of the Company's lasers to purchase only products which are compatible with this system. The Company believes it can sell these products on a custom basis to hospital administrators for other surgical laser systems at a significant discount to competitors' published prices, while maintaining gross margins through vertical integration and the extensive use of molds and tooling. The Company also assembles and/or distributes a full line of laser accessories, including glasses, goggles, laser signs and smoke evacuators. Corneal Topography Products EyeSys 2000 Corneal Analysis System. The EyeSys System 2000 corneal topography instrument and Microsoft Windows based software is targeted at refractive surgeons, general ophthalmologists and optometrists for diagnostic, surgical and contact lens fitting applications. The primary function of the instrument is to position a patient for corneal image capture, acquire the image of reflected rings and send the image to an Intel based personal computer for further processing. The System 2000 is modular and is marketed as a proprietary computer peripheral and software. The System 2000 hardware interfaces to the computer via a parallel port connection, allowing EyeSys to unbundle the computer, monitor, printer, tables and other third party items. This can significantly lower the price to the customer by allowing physicians to utilize hardware they already own. Customers that need to purchase nonproprietary hardware are given the option of ordering through EyeSys or obtaining suitable hardware on their own. The EyeSys System 2000 software modules are Microsoft Windows applications and include the following basic modules: Patient Examination Software. This core application is the fundamental software marketed by EyeSys and is required to perform corneal topography examinations. It provides the control functions for EyeSys' System 2000 instrumentation as well as image processing and basic topographical mapping capability. Patient History Software. This application provides a database for patient topographic and demographic data as well as the results of other tests performed as part of an eye examination. This software includes the ability to compare multiple corneal topography examinations for a patient allowing 12 the clinician to monitor surgical and other corneal changes over time. Features include the ability to digitally subtract multiple examinations, providing high resolution analysis of corneal changes. Advanced Diagnostic Software. This application provides software tools to allow for diagnosing corneal pathologies and analyzing visual function. More specifically, this package presents unique information on the cornea's refractive power, aspherecity and optical surface distortion. Pro-Fit Contact Lens Fitting Software. Pro-Fit utilizes the available corneal topography data to recommend specific lenses which can be selected from a comprehensive worldwide database of rigid gas permeable (RGP or "hard") and soft lenses. This application also has been designed for the needs of foreign markets, particularly for the European market where contact lens fitting methods and practices differ from those in the United States. At the American Academy of Ophthalmology the Company introduced what it believes to be the smallest hand held topography system currently available. The Vista(TM) incorporates much of the same reliable and accurate software as the System 2000, but its portability facilitates its use in the operating room or by the optometrist. Ocular Imaging Products OIS currently offers two products to the ophthalmic market: WinStation 640 and the WinStation 1024. Over the past 35 years fluorescein angiography has been performed using photographic film which requires special processing and printing. The WinStation systems allow for immediate diagnosis and treatment of the patient. Images are automatically data based and are permanently stored on optical laser disk or CD-ROM. OIS offers a variety of networking and printer options to best fit the practice needs. OIS's WinStation systems are also used by ophthalmologists to perform indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test procedure which is yielding new clinically significant information that is helpful in the treatment of patients with macular degeneration (a leading cause of blindness afflicting over 13 million people in the U.S.). ICG angiography, used for approximately 10-20% of patient angiography, is a dye procedure that can only be performed using a digital imaging system. 13 Other Products OIS also developed the Glaucoma-Scope(R)(TM), designed for use by ocular health providers that manage patients with glaucoma by providing a means for comparing optic nerve head topography over a number of patient visits. While OIS has sold Glaucoma-Scope(R)(TM) units in the past, it no longer actively markets this product for sale. Marketing, Sales and Service Marketing and Sales The Company markets its products to the dental market in the United States directly to dentists and periodontists through its direct sales force consisting of seven area sales managers and its distributor and manufacturer's representative network consisting of approximately ten manufacturer's representatives and numerous international distributors. The Company markets its products primarily through conventions, educational courses, direct mail, telemarketing and other dental training programs. The dental market includes approximately 129,000 practicing dentists in the United States. The Company believes that in order to reach this market it must expand its U.S. distribution capabilities. Accordingly, Premier signed a letter of intent in December 1997 with Henry Schein, Inc. However, a dispute has arisen between the companies which makes the viability of this relationship uncertain. Through an active program of educational courses and preceptorships, the Company has trained dentists in many countries during the past year using industry recognized dentists and periodontists. The Company markets its products in the ophthalmic market through a sales manager and eight territory managers who focus their efforts on key ophthalmologists worldwide. The Company has entered into distribution agreements with distributors in many countries for sales of its diagnostic products and in preparation for market introduction of the Centauri laser. The Company grants exclusive distribution rights in select territories to its distributors who usually must maintain certain distribution minimums in order to retain their exclusive rights. The Company plans to expand its ophthalmic sales force both by enlarging its domestic sales force, either internally or through acquisition, by acquiring or engaging additional international manufacturing representatives, and by having existing international distributors carry other of the companies product lines. The Company's acquisition of EyeSys in September 1997 has aided, and is expected to continue to aid, in the establishment of increased international distribution, as EyeSys utilizes 55 distributors in 60 countries. Sales, marketing and telemarketing efforts for ophthalmic products are managed out of Sacramento, California. On June 2, 1997, EyeSys entered into an agreement with Marco Ophthalmic Inc. ("Marco") pursuant to which that company was appointed as a nonexclusive distributor in the United States of the System 2000 and the exclusive distributor of the Vista portable corneal topography system for a three-year period following commercialization of that system. In the surgical market, the Company intends to form strategic alliances in any specialty area where the partner has an established presence in the market selling to either the physician or the hospital. The Company has entered into such a strategic alliance with Nippon Shoji Kaisha, Ltd. ("NSK"), which is one of the leading suppliers of sutures in the Pacific Rim pursuant to an Exclusive Marketing Agreement. Under this agreement, Proclosure granted to NSK, in exchange for a license fee, the exclusive rights to market and distribute the Polaris Nd:YAG laser in Japan, China and Taiwan. In addition, under this agreement the Company granted to NSK an option to manufacture the Polaris, which if exercised would require NSK to pay the Company a $1.5 million fee and royalties. NSK has not yet indicated whether it intends to manufacture these products. There can be no assurance that the Company will receive any payments under this agreement. No customer accounted for more than 10% of net sales by the Company (on a consolidated basis) in fiscal 1998 or fiscal 1997. During calendar 1997, three customers each accounted for more than 10% of the sales of EyeSys: Marco Technologies accounted for 13% of sales, Newtech accounted for 14% of sales and Vistatek accounted for 15% of sales. 14 Customer Service and Support The Company is seeking to create a group of loyal customers by focusing on customer service, quality and reliability. In addition to its educational courses, the Company performs a complete 15 installation of its products and trains the customers' staff in its proper use. Educational videos and papers are available upon request. The Company conducts service training courses for the representatives of its distributors. Prior to shipping, every product is subjected to an extensive battery of quality control tests. The Company generally provides a one year warranty with all products and extended warranties are available at an additional cost. If service is required, a product owner is either sent a loaner product by overnight carrier, returns his product for service or a service representative visits the owner to repair the unit. International service is provided either by the foreign distributor or by return of the product to the Company. The Company has experienced and may continue to experience difficulties in providing prompt and cost-effective service of its products. The Company is working to improve the service training of its international distributors and U.S. technicians. Competition Laser Business The Company is and will continue to be subject to competition in its targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies or therapies, some of which include medical lasers manufactured by competitors. In the dental market, the Company competes primarily with dental drills, traditional curing lights and other existing technologies, and to a lesser extent competitors' CO(2), argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, the Company is subject to competition principally from (i) traditional surgical treatments using a tearing needle in anterior capsulotomy, (ii) phacoemulsification, an ultrasound device used to break up cataracts in cataract removal procedures, (iii) corrective eyewear (such as eyeglasses and contact lenses) and surgical treatments for refractive disorders such as photorefractive keratectomy which is typically performed with an excimer laser and radial keratotomy which is performed with a scalpel, and (iv) drug therapy or surgical treatment of glaucoma. In the surgical market, wound closure procedures are usually performed using sutures and staples, and traditional cosmetic surgical procedures may be performed with a scalpel or other lasers. The Company believes that for many applications its patented or patent pending methods and fiberoptic delivery systems provide clinical benefits over other currently known technologies and competitors' laser products. The medical laser industry in particular is also subject to intense competition and rapid technological change. The Company believes that there are approximately 30 competitors in different sectors of the medical laser industry. The Company believes that the principal competitive factors for medical laser products are the products' technological capabilities, proven clinical ability, patent protection, price and scope of regulatory approval, as well as industry expert endorsements. Many conventional laser systems target one particular application, while the Company's Er:YAG system is designed to perform in multiple therapeutic applications. The Company's self-contained units are significantly smaller than competitive surgical models, have internal cooling devices and are powered primarily by dedicated readily available 110 volt lines instead of the 220 volt lines used by most surgical solid state lasers. The specialized menu-driven system software utilized in the Company's lasers also enhances safety and ease of use of the lasers. The Company believes that its ability to compete successfully against traditional treatments, competitive laser systems and treatments that may be developed in the future will depend on its ability to create and maintain advanced technology, develop proprietary products, obtain required regulatory approvals and clearances for its products, attract and retain scientific personnel, obtain patent or other proprietary protection for its products and technologies, and manufacture and successfully market products either alone or through other parties. Certain of the Company's competitors have substantially greater financial, technical and marketing resources than the Company. There can be no assurance that such competition will not adversely affect the Company's results of operations or its ability to maintain or increase market share. 16 Topography Business EyeSys' primary competitors in the corneal topography market are Tomey Technology ("Tomey"), Alcon Surgical, Inc., a subsidiary of Nestle ("Alcon"), and Humphrey Instruments, a subsidiary of Carl Zeiss ("Humphrey"). Tomey, a Japanese ophthalmic diagnostic instrument manufacturer, has historically been EyeSys' principal established competitor. Tomey initially obtained worldwide marketing rights for the TMS-1 topography system from Computed Anatomy, the product's developer, and subsequently purchased Computed Anatomy. Computed Anatomy first introduced a placido disk based topography unit at the 1987 American Academy of Ophthalmology ("AAO") meeting. The Tomey instrument distinguishes itself with a small placido and a very short working distance. Alcon, by its 1993 acquisition of Visioptic Inc., became a competitor of EyeSys, with considerable financial and marketing strength. Visioptic first introduced its placido disc based topography system at the AAO in 1989. The founder of Visioptic, Sami El Hage, OD, is a pioneer in three-dimensional measurement of the cornea and holds several patents on both the EH-270 placido ring based system and algorithms used in the device. Humphrey, with its acquisition of the corneal topography business of Optical Radiation Corporation (ORC), entered the corneal topography market at the American Academy of Ophthalmology meeting in San Francisco in October 1994. Humphrey has a strong international reputation in diagnostic instrumentation. Other placido based instruments and other technologies such as those produced by PAR and Orbtek are marketed or are under development by other companies, although to date none of such companies has achieved appreciable market share. EyeSys anticipates that it will encounter established competitors as it enters new markets for ophthalmic instrumentation. Some of these competitors may have greater financial, technical and marketing resources. Ocular Imaging Business The healthcare industry is characterized by extensive research and development efforts and rapid technological change. Competition for products that can diagnose and evaluate eye disease is intense and is expected to increase. The Company is aware of two primary OIS competitors in the U.S. which produce and are delivering digital fundus imaging systems, Topcon and Tomey. Four other companies are known to have systems in the international market, each with lesser market penetration. Topcon is OIS's main competitor in the angiography market. Topcon angiography products predominantly interface with Topcon fundus cameras while OIS's systems interface with 17 different models or fundus cameras from a wide variety of manufacturers. Although OIS will continue to work to develop new and improved products, many companies are engaged in research and development of new devices and alternative methods to diagnose and evaluate eye disease. Introduction of such devices and alternative methods could hinder OIS's ability to compete effectively and could have a material adverse effect on its business, financial condition and results of operations. Many of OIS's competitors and potential competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources than OIS. Seasonality To date, the Company's revenues have typically been significantly higher in the second and fourth calendar quarters. This seasonality reflects the timing of major medical and dental industry trade shows 17 in these quarters, significantly reduced sales during the summer and the effect of year end tax planning influencing the purchasing of capital equipment for depreciation during the fourth calendar quarter. Although revenues during the summer of 1996 did not follow this historical pattern, the Company expects that this seasonality will continue indefinitely. Research and Development Laser Business In the past three fiscal years, the Company (excluding EyeSys, Data.Site and OIS) has invested in excess of $5.8 million in research and development programs. This amount includes approximately $700,000 received under a Small Business Innovative Research Grant in fiscal 1996 and 1997, however; it excludes a $9.2 million non cash charge for in-process research and development related to the EyeSys acquisition in fiscal 1998. The Company's research and development programs have capitalized on the research and development activities conducted by Pfizer Laser wherein that company identified key military and aerospace technologies and adapted these technologies to portable, efficient, solid-state laser products that were modular in nature. This investment in research and development has resulted in the development of 20 models of lasers, reusable accessories such as smoke evacuators and irrigation aspiration systems, more than 1,000 types of custom delivery systems and approximately 20 types of surgical tips and accessories. In order to maintain its technological advantage, the Company must continue to invest in new product development. The Company seeks to augment its funding of research and development through government grants. The Company has previously been awarded a Phase II SBIR grant of $750,000, substantially all of which has been drawn to fund additional research and clinical trials regarding laser emulsification of cataracts. The Company has also applied for new Phase I research grants related to dentistry, orthopedics, tissue melding, and ophthalmology. No assurance can be given that the Company will be awarded any of these potential government grants. The Company's current research is focused on expanding the clinical applications of its existing products, reducing the size and cost of current laser systems, developing custom delivery systems and developing new innovative products. The Company's in-house research and development efforts have focused on the development of a systems approach to medical laser products with proprietary delivery systems designed to allow the laser to interact with tissue by a number of different mechanisms (e.g., acoustic, ablative and thermal) for unique laser/tissue effects. These disposable fiberoptic delivery systems, developed specifically for niche surgical applications, demonstrate the principal focus of the Company's research efforts. Examples of patented or patent pending products resulting from these research efforts include: TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO(2) waveguides. Clinical research has also yielded several new surgical procedures. Corneal Topography Business EyeSys' research and development efforts are focused on further development of corneal topography systems, advanced applications software development, internationalization of software, minimization, simplification and optimization of the instrument and development of the next generation ophthalmic instrumentation. Ocular Imaging Business OIS intends to devote significant resources to the development of telemedicine/managed care applications, the improvement of optics, new fundus camera interfaces for ICG, software development (including the continued enhancement of WinStation), hardware optimization, and the patient/doctor interface. OIS's research and development expenditures in the periods ended August 31, 1997 and 1996, were $1,070,192 and $846,034, respectively. Patents and Patent Applications Patent protection is an important part of the Company's business strategy, and the Company's success depends, in part, on its ability to maintain patents and trade secret protection and on its ability 18 to operate without infringing on the rights of third parties. The Company has sought to protect its unique technologies and clinical advances through the use of the patent process. Patent applications filed in the United States are frequently also filed in selected foreign countries. The Company focuses its efforts on filing only for those patents which the Company believes will provide it with key defensible features instead of filing for all potential minor device features. In the United States, the Company holds 33 patents which expire at various times throughout approximately the next 6-17 years, and has an additional 24 pending patent applications, including divisional applications. In addition, the Company holds 23 foreign patents including two utility model patents and has at least 44 foreign patent applications. The Company also has a nonexclusive license to a number of basic laser technologies which are commonly licensed on such basis in the laser industry. OIS holds one patent covering its current products. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve trade secrets and to operate without infringing the rights of others. There can be no assurance that the Company's patents or trademarks, if granted, would be upheld if challenged, or that competitors might not develop similar or superior processes or products outside the protection of any patents issued to the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent or trademark infringement or proprietary rights violation action. Moreover, if its products infringe patents, trademarks or proprietary rights of others, the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. The Company is aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict the Company's right to market certain of its technologies without a license, including, without limitation, patents relating to the Company's lens emulsification product and ophthalmic probes for its Er:YAG laser. In the past, the Company has received allegations that certain of the Company's laser products infringe other patents. There has been significant patent litigation in the medical industry in general, and in the medical laser industry in particular. Adverse determinations in litigation or other patent proceedings in which the Company may become a party could subject the Company to significant legal judgments or liabilities to third parties, and could require the Company to seek licenses from third parties that may or may not be economically viable. Patent and other intellectual property rights disputes often are settled through licensing arrangements. No assurance can be given that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. If the Company is found, in a legal proceeding, to have infringed the patents or other proprietary rights of others, it could be liable for significant damages. These damages may be mitigated in some cases by patent infringement insurance held by the Company. The Company also relies on unpatented proprietary technology, trade secrets and know-how. Certain components of the Company's products are largely proprietary and constitute trade secrets, but others are purchased from third parties. There is no assurance that other parties will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to its unpatented trade secrets. The Company seeks to protect its unpatented proprietary technology, in part, through proprietary confidentiality and nondisclosure agreements with employees, consultants and other parties. The Company's confidentiality agreements with its employees and consultants generally contain industry standard provisions requiring such individuals to assign to the Company without additional consideration any inventions conceived or reduced to practice by them while employed or retained by the Company, subject to customary exceptions. There can be no assurance that proprietary information agreements with employees, consultants and others will not be breached, that the Company would have adequate remedies 19 for any breach or that the Company's trade secrets will not otherwise become known to or independently developed by competitors. Government Regulation FDA Regulation The products that are manufactured by the Company are regulated as medical devices by the FDA under the Food, Drug and Cosmetics Act (the "FDC Act"). Satisfaction of applicable regulatory requirements may take several years and requirements vary substantially based upon the type, complexity and novelty of such devices as well as the clinical procedure. Pursuant to the FDC Act and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, denial or withdrawal of premarket clearance or approval for devices, recommendations by the FDA that the Company not be allowed to enter into government contracts, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. The FDA classifies medical devices in commercial distribution into one of three classes: Class I, II or Ill. This classification is based on the controls the FDA deems necessary to reasonably ensure the safety and effectiveness of medical devices. Class I devices are subject to general control (e.g., labeling, premarket notification and adherence to applicable requirements for Good Manufacturing Practices, or "GMP's") and Class II devices are subject to general and special controls (e.g., performance standards, postmarket surveillance, patient registries, and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices). The Company's laser and diagnostic products typically are classified as Class II devices, but the FDA may classify certain indications or technologies into Class III and require a premarket approval application ("PMA"). OIS's products are classified as Class II devices (special controls) which require, among other things, annual registration, listing of devices, good manufacturing practices and labeling, and prohibition against misbranding and adulteration. If a manufacturer or distributor of a medical device can establish that a proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a pre-1976 Class III medical device for which the FDA has not called for a PMA, the manufacturer or distributor may seek FDA clearance for the device by filing a Section 510(k) premarket notification. If a manufacturer or distributor of a medical device cannot establish that a proposed device is substantially equivalent to another legally marketed device, the manufacturer or distributor will have to seek premarket approval for the proposed device. A 510(k) notification and the claim of substantial equivalence will likely have to be supported by various types of data and materials, possibly including test results or the results of clinical studies in humans. A PMA would have to be submitted and be supported by extensive data, including preclinical and clinical study data, to prove the safety and effectiveness of the device. There can be no assurance that some of the Company's products will not require the more rigorous and time consuming PMA approval, including laser uses for vasovasotomy or other tissue melding procedures, cavity preparation, cosmetic surgery, sclerostomy and lens emulsification, among others. If human clinical studies of a proposed device are required, whether for a 510(k) or a PMA, and the device presents a "significant risk," the manufacturer or the distributor of the devices will have to file an IDE application with the FDA prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and mechanical laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific 20 number of patients, as approved by the FDA. Submission of an IDE does not give assurance that FDA will approve the IDE and, if it is approved, there can be no assurance that the FDA will determine that the data derived from these studies support the safety and efficacy of the device or warrant the continuation of clinical studies. Sponsors of clinical studies are permitted to charge for those devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. Clinical studies of nonsignificant risk devices may be performed without prior FDA approval, but various regulatory requirements still apply, including the requirement for approval by an IRB, conduct of the study according to applicable portions of the IDE regulations, and prohibitions against commercialization of an investigational device. The manufacturer or distributor may not place the device into interstate commerce until an order is issued by the FDA granting premarket clearance for the device. The FDA has no specific time limit by which it must respond to a 510(k) premarket notification. The FDA has recently been requiring more rigorous demonstration of substantial equivalence in connection with 510(k) notifications and the review time can take four to 12 months or longer for a 510(k). If a PMA submission is filed, the FDA has by statute 180 days to review it; however, the review time is often extended significantly by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee may also evaluate the application and provide recommendations to the FDA as to whether the device should be approved. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA's good manufacturing practice requirements prior to approval of a PMA. Devices are cleared by 510(k) or approved by PMA only for the specific intended uses claimed in the submission and agreed to by the FDA. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. Marketing or promotion of products for medical applications other than those that are cleared or approved could lead to enforcement action by the FDA. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances for its products on a timely basis or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future requirements would have a material adverse effect on the Company's business, financial condition and results of operations. FDA or other governmental approvals of products developed by the Company in the future may require substantial filing fees which could limit the number of applications sought by the Company and may entail limitations on the indicated uses for which such products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. Regulatory Status of Products The Company has received 510(k) clearance to market the following lasers in an aggregate of more than 100 specialty areas: CO(2) (four models: 10W, 20W, 35W, 65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG (two models); 1.32 micron Nd:YAG (two models: 15W, 25W); .532 micron Nd:YAG (one model); Argon (three models); diode (two models); Nd:YAG/Er:YAG combination laser (one model). Each of these lasers has clearances in multiple specialty areas. The Company also has received 510(k) clearance to market a scanner, sculptured fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips for all cleared wavelengths of the Company's lasers as well as argon lasers. If a device for which the Company has already received 510(k) premarket clearance is changed or modified in design, components, method of manufacture or intended use, such that the safety or effectiveness of the device could be significantly affected, a new 510(k) premarket notification is 21 required before the modified device can be marketed in the United States. The Company has made modifications to certain of its products which the Company believes do not require the submission of new 510(k) notifications. However, there can be no assurance that the FDA will agree with the Company's determinations and not require the Company to discontinue marketing one or more of the modified devices until they have been cleared by the FDA. There also can be no assurance that any such clearance of modifications would be granted should clearance be necessary. OIS has received 510(k) clearance for its Glaucoma-Scope(R)(TM) and its digital angiography product, and EyeSys has received 510(k) clearance for its System 2000 and Vista corneal topography systems. The Company currently is conducting preclinical animal studies and clinical trials, both under approved IDEs and as nonsignificant risk studies. There can be no assurance that the results of any of these clinical studies will be successful or that the FDA will not require the Company to discontinue any of these studies in the interest of the public health or due to any violations of the FDA's IDE regulations. There can be no assurance that the Company will receive approval from the FDA to conduct any of the significant risk studies for which the Company seeks IDE approval, or that the FDA will not disagree with the Company's determination that any of its studies are "nonsignificant risk" studies and require the Company to obtain approval of an IDE before the study can continue. Additional Regulatory Requirements Any products manufactured or distributed by the Company pursuant to a 510(k) premarket clearance notification or PMA are or will be subject to pervasive and continuing regulation by the FDA. The FDC Act also requires the Company to manufacture its products in registered establishments and in accordance with current GMP regulations, which include testing, control and documentation requirements. The Company must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, would be likely to cause or contribute to a death or serious injury. The Company's facilities in the United States are subject to periodic inspections by the FDA. The FDA may require postmarketing surveillance with respect to the Company's products. The export of medical devices is also subject to regulation in certain instances. All lasers manufactured by the Company are subject to the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health of the FDA. The law requires laser manufacturers to file new product and annual reports and to maintain quality control, product testing and sales records, to incorporate certain design and operating features in lasers sold to end users pursuant to a performance standard, and to comply with labeling and certification requirements. Various warning labels must be affixed to the laser, depending on the class of the product under the performance standard. In addition, the use of the Company's products may be regulated by various state agencies. For instance, the Company is required to register as a medical device manufacturer with certain state agencies. In addition to being subject to inspection by the FDA, the Company also will be routinely inspected by the State of California for compliance with GMP regulations and other requirements. Although Premier believes that it currently complies in all material respects and will continue to comply with the applicable regulations regarding the manufacture and sale of medical devices, such regulations are always subject to change and depend heavily on administrative interpretations. Premier plans to integrate OIS's manufacturing operations under Premier's GMP practices and at its facilities over the next several months. There can be no assurance that future changes in law, regulations, review guidelines or administrative interpretations by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company's business, financial condition and results of operations. In addition to the foregoing, the Company is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous 22 substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon the Company's ability to conduct business. Furthermore, the introduction of the Company's products in foreign countries often require obtaining foreign regulatory clearances, and additional safety and effectiveness standards are required in certain other countries. The Company believes that only a limited number of foreign countries currently have extensive regulatory requirements. These countries include the European Union countries, France, Germany, Canada, Mexico and Japan. Domestic manufacturing locations of American companies doing business in certain foreign countries, including European Union countries, may be subject to inspection. The time required for regulatory approval in foreign countries varies and can take a number of years. During the period in which the Company will be attempting to obtain the necessary regulatory approvals, the Company expects to market its products on a limited basis in certain other countries that do not require regulatory approval. There can be no assurance that the Company's products will be cleared or approved by the FDA or other governmental agencies for additional applications in the United States or in other countries or that countries that do not now require regulatory approval will not require such approval in the future. Manufacturing and Materials Manufacturing consists of component assembly and systems integration of electronic, mechanical and optical components and modules. The Company's product costs are principally related to the purchase of raw materials while labor and overhead have been reduced due to the use of customized tooling and automated test systems. The Company believes that its customized tooling and automated systems improve quality and manufacturing reliability resulting in lower overall manufacturing costs. The Company believes that these systems will allow the Company to expand production rapidly. The Company purchases certain raw materials, components and subassemblies included in the Company's products from a limited group of qualified suppliers and does not maintain long-term supply contracts with any of its key suppliers. While multiple sources of supply exist for most critical components used in the laser, corneal topography and fiberoptic delivery systems, the disruption or termination of these sources could have a material adverse effect on the Company's business and results of operations. Vendor delays or quality problems could also result in production delays of up to six months as several components have long production lead times. These long lead times, as well as the need for demonstration units, require a significant portion of working capital to fund inventory growth. The Company has in the past experienced and may continue to experience shortages in raw materials and certain supplies. The Company owns the molds used to produce certain proprietary parts of the devices. The Company also designs and develops the software necessary for the operation of its laser systems. The Company designs and assembles its own fiberoptic delivery systems and laser accessory equipment such as laser carts and associated disposable supplies. The Company believes that its manufacturing practices are in accordance with GMP regulations. OIS Manufacturing and Production OIS is primarily a systems integrator with proprietary software, optical interfaces, and electronic fundus camera interfaces. Certain components are subcontracted to outside vendors and assembled at OIS. OIS inventories and assembles components in a facility located in Sacramento, California. For production of certain components of its products, OIS's manufacturing strategy is to use subcontractors to minimize time and reduce capital requirements. 23 OIS's product line is manufactured by assembling components purchased from established outside quality vendors as well as certain components manufactured by OIS. Proprietary components manufactured by OIS include interface circuit boards for 17 fundus camera models, video optical interfaces including ICG and live viewing options. The Glaucoma- Scope(R)(TM) optical head is also manufactured by OIS. As a systems integrator, a significant number of the major hardware components in OIS's products are procured from sole source vendors. Whenever possible, however, OIS seeks multiple vendor sources from which to procure its components. As with any manufacturing concern dependent on subcontractors and component suppliers, significant delays in receiving products or unexpected vendor price increases could adversely affect OIS. Product Liability and Insurance Since the Company's products are intended for use in the treatment of human medical conditions, the Company is subject to an inherent risk of product liability and other liability claims which may involve significant claims and defense costs. The Company currently has product liability insurance with coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate per year. Product liability insurance is expensive and subject to various coverage exclusions, and in the future may not be available in acceptable amounts, on acceptable terms, or at all. Although the Company does not have any outstanding product liability claims, in the event the Company were to be held liable for damages exceeding the limits of its insurance coverage or outside of the scope of its coverage, the business and results of operations of the Company could be materially adversely affected. The Company's reputation and business could also be adversely affected by product liability claims, regardless of their merit or eventual outcome. Employees As of June 25, 1998, the Company (including EyeSys, but excluding Data.Site and OIS) employed 102 people, 2 of whom are employed on a part-time basis. None of these employees are represented by a union. Twenty-seven employees perform sales, marketing and customer support activities. The remaining employees perform manufacturing, financial, administration, regulatory, research and development and quality control activities. The Company also engages the services of many 24 independent contractors and temporary personnel. The Company believes that its relationship with its employees is good. OIS and Data.Site Employees As of June 23, 1998, OIS had 29 employees, and Data.Site had 13 employees, all of which were full time employees. OIS also engages the services of consultants from time to time to assist OIS on specific projects in the area of research and development, software development, regulatory affairs, and product services. These consultants periodically engage contract engineers as independent consultants for specific projects. OIS has no collective bargaining agreements covering any of its employees, has never experienced any material labor disruption, and is unaware of any current efforts or plans to organize its employees. OIS considers its relationship with its employees to be good. RISK FACTORS The Company's securities are highly speculative in nature and an investment in such securities involves a high degree of risk. Prospective investors should carefully consider, along with the other information contained in this Annual Report, the following considerations and risks in evaluating an investment in the Company. Limited Operating History; Continuing Operating Losses The Company was formed in July 1991 and has not generated significant revenues to date. As of March 31, 1998, the Company had a substantial accumulated deficit. The Company also had substantial operating losses for each of the four fiscal years ended March 31, 1998, resulting principally from costs incurred in research and development and other costs of operations. The Company expects that operating losses will continue until such time as product sales generate sufficient revenues to fund its continuing operations, as to which there can be no assurance. The Company may incur losses for the foreseeable future due to the significant costs associated with manufacturing, marketing and distributing its laser products and due to continual research and development activities which will be necessary to develop additional applications for the Company's technology. Uncertainties Concerning Future Profitability The Company's ability to achieve profitability will depend, in part, on its ability to continue to successfully develop clinical applications, obtain regulatory approvals for its products and develop the capacity to manufacture and market such products on a wide scale. There is no assurance that the Company will be able to successfully make the transition from research and development to manufacturing and selling commercial medical laser products on a broad basis. While attempting to make this transition, the Company will be subject to all risks inherent in a growing venture, including the need to produce reliable products, develop marketing expertise and enlarge its sales force. Uncertain Market Acceptance The Company's future sales are dependent, in part, on the Company's ability to demonstrate to dentists, ophthalmologists and other physicians the potential cost and performance advantages of its laser systems and other products over traditional methods of treatment and over competitive products. To date, commercial sales of the Company's lasers have been limited, and no assurance can be given that these laser products can be successfully commercialized on a broad basis. Lasers have not been widely used in dentistry and their use requires training and expertise. The acceptance of dental lasers may be adversely affected by their high cost, concerns by patients and dentists relating to their safety and efficacy, and the substantial market acceptance and penetration of alternative dental tools such as the dental drill. Current economic pressure may make doctors and dentists reluctant to purchase substantial 25 capital equipment or invest in new technology. The failure of medical lasers to achieve broad market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. No assurance can be given that any of the Company's products will be accepted by the medical or dental community or by patients, or that a significant market for the Company's systems will be developed and sustained. The Company currently has a limited sales force and will need to hire additional sales and marketing personnel to increase the general acceptance of its products. Pending Litigation and Regulatory Investigations The Company is a defendant in a number of related securities class action matters, generally relating to allegations of misrepresentations by the Company during the period May 7, 1997 to April 15, 1998 (the "Class Action Litigation"), as well as a shareholder derivative action. In addition, the SEC and Nasdaq Stock Market have commenced investigations of the Company's practices and procedures relating to revenue recognition issues and related matters. The Company's defense of the litigation matters, and responses to the regulatory investigations, will be expensive and time consuming to the Company's management, and are expected to materially and adversely affect the Company's results of operations for the foreseeable future. If an adverse judgement is entered in the Class Action Litigation, or the Company settles such litigation, such judgement or settlement could also materially and adversely affect the Company's business and results of operations. In addition, the SEC and Nasdaq Stock Market are empowered to assess substantial penalties against the Company, in connection with their findings in the pending investigation. The Nasdaq Stock Market is also empowered to take various actions relating to the listing of the Company's securities on the Nasdaq Stock Market, and has notified the Company that it proposes to delist the Company's securities from the Nasdaq Stock Market. The Company has filed an appeal of this proposed action. The imposition of any of such penalties could materially and adversely affect the Company's business, financial condition and results of operations. Possible Restatement of Financial Results The Company, in conjunction with its independent accountants, is conducting an analysis of its historical revenue recognition practices, including but not limited to those employed in connection with its transactions with Henry Schein, Inc. The period under review includes fiscal 1997 and fiscal 1998 including interim periods. Upon completion of that analysis, the Company may determine that it is appropriate to restate the financial statements in one or more of its past SEC filings. If made, such restatements may involve a reduction in the amount of revenue reported for such periods, increased reserves for accounts receivable and slow moving and absolete inventory, together with corresponding adjustments to net income or net loss and other items of the financial statements. Such reductions may be material. Suspension of Trading of Securities. On May 26, 1998, following the withdrawal by the Company's former accountant of its report on the Company's fiscal 1997 financial statements, the Nasdaq Stock Market suspended trading of the Company's Class A Common Stock and Class B Warrants, pending an investigation of certain of the Company's accounting practices. Although the Company is cooperating with this investigation, and has engaged new auditors for the purpose of certifying the Company's 1997 and 1998 financial statements, no assurance can be given that the Company will be able to meet any conditions that may be imposed by the Nasdaq Stock Market in order for the suspension of trading to be terminated. Unless and until the suspension is terminated or other arrangements are made for creating a market for the Company's securities, such securities will continue to be highly illiquid. The absence of a public trading market for the Company's securities will materially and adversely affect the market value of such securities. In addition, OIS's Common Stock is trading on the OTC "bulletin board," which provides less liquidity than a listing on the Nasdaq Stock Market or an exchange. To the Company's knowledge, OIS has no plans to apply for the listing of its Common Stock on the Nasdaq Stock Market or an exchange. Integration of Acquired Businesses The Company acquired EyeSys in September 1997. The Company is still in the process of integrating and coordinating the EyeSys business with the Company's existing businesses. Although the Company believes that there are certain synergies in the two lines of business, it may continue to incur expenses in connection with its efforts to integrate the two businesses. In addition, members of the Company's management will also have to continue to expend time and effort on new activities relating to the EyeSys operations, which will detract from their time available to attend to the Company's other activities. No assurance can be given that the expenses or dislocations the may suffer or incur as a result of the post-Merger coordination of these businesses will not be material. Considerations similar to the above apply equally to the Company's acquisition of a controlling interest in OIS. The Company currently markets EyeSys' corneal topography and OIS digital imaging products in a highly competitive market. Historically, EyeSys and OIS have incurred substantial losses. The ability of these subsidiaries to achieve a break even level of performance is dependent on the demand for its products as well as maintaining sufficient research, development and sales and marketing expenditures to meet the requirements of the market. There can be no assurance that the revenues from these product lines will be sufficient to cover all of the expenses related to such operations. If these subsidiaries are unable to achieve a break-even cash flow performance, additional levels of capital will be required. Going Concern Report With Respect to EyeSys EyeSys' independent auditors have included an explanatory paragraph in their report covering EyeSys' financial statements for the year ended December 31, 1996, which paragraph emphasizes substantial doubt as to EyeSys' ability to continue as a going concern. EyeSys' independent auditors cited the following reasons for such explanatory paragraph: (i) EyeSys has reported net losses of $4,164,998, $3,424,996 and $3,708,657 for the years ended December 31, 1996, 1995 and 1994, respectively, (ii) EyeSys was in default of several loan covenants relating to its revolving lines of credit, and (iii) Eyesys has not repaid such loan obligations within their respective terms. 26 Dependence on Suppliers The Company purchases certain raw materials, components and subassemblies included in the Company's products from a limited group of qualified suppliers and does not maintain long-term supply contracts with any of its key suppliers. The disruption or termination of these sources could have a material adverse effect on the Company's business and results of operations. For example, during fiscal 1994, the Company's sole supplier of the specialized optic fiber required for use in the Company's Er:YAG lasers ceased to provide this fiber to the Company. While the Company has since qualified the new suppliers of this fiber, the Company's inability to obtain sufficient quantities of this specialized optical fiber had a material adverse effect on the volume of Er:YAG lasers the Company was able to sell during fiscal 1994 and 1995. While the Company believes that alternative suppliers could be found, there can be no assurance that any supplier could be replaced in a timely manner. Any interruption in the supply of other key components could have a material adverse effect on the Company's ability to manufacture its products and on its business, financial condition and results of operations. Certain computer components used by EyeSys and OIS are manufactured by a sole vendor. These components are subject to rapid innovation and obsolescence. The discontinuance of the manufacturing of this chip may require the Company to redesign certain hardware and software to accommodate a replacement component. While in the past the Company has been successful in these redesign efforts, there can be no assurance that such an event would not prove costly or cause a disruption in sales of corneal topography and digital imaging systems. Risks Applicable to Foreign Sales Sales of the Company's products to foreign markets account for a substantial portion of the Company's sales. Foreign sales expose the Company to certain risks, including the difficulty and expense of maintaining foreign sales distribution channels, barriers to trade, potential fluctuations in foreign currency exchange rates, political and economic instability, availability of suitable export financing, accounts receivable collections, tariff regulations, quotas, shipping delays, foreign taxes, export licensing requirements and other United States and foreign regulations that may apply to the export of medical lasers. The regulation of medical devices worldwide also continues to develop, and there can be no assurance that new laws or regulations will not have an adverse effect on the Company. In addition, the Company may experience additional difficulties in providing prompt and cost effective service of its medical lasers in foreign countries. The Company does not carry insurance against such risks. The occurrence of any one or more of these events may individually or in the aggregate have a material adverse effect upon the Company's business, financial condition and results of operations. Risk of Technological Obsolescence The markets in which the Company's medical products compete are subject to rapid technological change as well as the potential development of alternative surgical techniques or new pharmaceutical products. Such changes could render the Company's products uncompetitive or obsolete. The Company will be required to invest in research and development to attempt to maintain and enhance its existing products and develop new products. No assurances can be given that such research and development efforts will result in the introduction of new products or product improvements. Dependence on Patents and Proprietary Technology The Company's success will depend in part on its ability to obtain patent protection for products and processes, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. While the Company holds a number of U.S. foreign patents and has other patent applications pending in the United States and foreign countries, no assurance can be given that any additional patents will be issued, that the scope of any patent protection will exclude competitors or that any of the 27 Company's patents will be held valid if subsequently challenged. Further, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or design products that circumvent any patents used by the Company. The Company is aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict the Company's right to market certain of its technologies without a license, including, without limitation, patents relating to the Company's lens emulsification product and ophthalmic probes for the Er:YAG laser. In the past, the Company has received allegations that certain of the Company's laser products infringe other patents. American Dental Technologies ("ADT") recently has asserted that an aspect of the delivery system of the Company's Er:YAG laser infringes a patent held by ADT. There has been significant patent litigation in the medical industry in general, and in the medical laser industry in particular. Adverse determinations in litigation or other patent proceedings to which the Company may become a party could subject the Company to significant legal judgments or other liabilities to third parties and could require the Company to seek licenses from third parties that may or may not be economically viable. Patent and other intellectual property rights disputes often are settled through licensing arrangements. No assurance can be given that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. If the Company is found, in a legal proceeding, to have infringed the patents or other proprietary rights of others, it could be liable for significant damages. The Company also relies upon unpatented trade secrets, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent trade secrets. In addition, at each balance sheet date, the Company is required to review the value of its intangible assets based on various factors, such as changes in technology. Any adjustment downward in such value may result in a write-off of the intangible asset and a substantial charge to earnings, thereby adversely affecting the operating results of the Company in the future. Need for FDA and Foreign Governmental Approvals; Government Regulation The Company's products are regulated as medical devices by the FDA under the the FDC Act. As such, these devices require either Section 510(k) premarket clearance ("510(k)") or approval of a premarket approval application ("PMA") by the FDA prior to commercialization. Satisfaction of applicable regulatory requirements may take several years and varies substantially based upon the type, complexity and novelty of such devices, as well as the clinical procedure. Filings and governmental approvals may be required in foreign countries before the devices can be marketed in these countries. There is no assurance that further clinical trials of the Company's medical products or of any future products will be successfully completed or, if they are completed, that any requisite FDA or foreign governmental approvals will be obtained. FDA or other governmental approvals of products developed by the Company in the future may require substantial filing fees which could limit the number of applications sought by the Company and may entail limitations on the indicated uses for which such products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. Also, the Company has made modifications to certain of its existing products which it does not believe require the submission of a new 510(k) notification to the FDA. However, there can be no assurance that the FDA would agree with the Company's determination and not require the Company to discontinue marketing one or more of the modified devices until they have been cleared by the FDA. The Company is also required to adhere to applicable requirements for current Good Manufacturing Practices and radiological health requirements, to engage in extensive record keeping and reporting and to comply with the FDA's product labeling, promotional and advertising requirements. Noncompliance with state, local, federal or foreign requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, delay, denial or withdrawal of premarket clearance or approval of devices, 28 recommendations by the FDA that the Company not be allowed to enter into government contracts, and criminal prosecution, all of which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's manufacturing facilities are subject to periodic inspections by state and federal agencies, including the FDA, the California Department of Health Services, and comparable agencies in other countries. Dependence on Key Personnel The Company depends to a considerable degree on a limited number of key personnel, including Colette Cozean, Ph.D., its Chairman of the Board, President, Chief Executive Officer and Director of Research. Dr. Cozean is also an inventor of a number of the Company's patented technologies. During the Company's limited operating history, many key responsibilities within the Company have been assigned to a relatively small number of individuals. The loss of Dr. Cozean's services or those of certain other members of management could adversely affect the Company. The Company carries key person life insurance in excess of $3 million on Dr. Cozean. The Company has no employment agreements with its key personnel. The success of the Company will also depend, among other factors, on the successful recruitment and retention of qualified technical and other personnel. Highly Competitive Industry The medical equipment industry is subject to intense competition and is characterized by rapid technological change. The Company is and will continue to be subject to competition in its targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies, and competitive products. Many of the Company's competitors have substantially greater financial, marketing and manufacturing resources and experience than the Company. Furthermore, the Company expects other companies will enter the laser market, particularly as medical lasers gain increasing market acceptance. Significant competitive factors which will affect future sales in the marketplace include regulatory approvals, performance, pricing and general market acceptance. The opthalmic diagnostic market is highly competitive. There are many companies, both public and private, some with significantly greater resources than the Company engaged in this market. These companies include Topcon, Alcon Laboratories (a subsidiary of Nestle), Humphrey Instruments (a subsidiary of Carl Zeiss), and Tomey Technology. There can be no assurances that the Company's competitors will not succeed in developing technologies, procedures or products that are more effective or economical than those marketed or being developed by the Company or that would render the Company's products obsolete or noncompetitive. To continue to remain competitive, the Company must develop new software and hardware meeting the needs of ophthalmologists and optometrists. The Company's future revenues will depend, in part, on its ability to develop and commercialize these new products as well as on the success of development and commercialization efforts of its competitors. Potential Fluctuations in Quarterly Operating Results Due to the relatively high sales price of the Company's products and the low sales unit volume, minor timing differences in receipt of customer orders have produced and could continue to produce significant fluctuations in quarterly results. In addition, if anticipated sales and shipments in any quarter do not occur when expected, expenditures and inventory levels could be disproportionately high, and the Company's operating results for that quarter, and potentially for future quarters, would be adversely 29 affected. Quarterly results may also fluctuate based on a variety of other factors, such as seasonality, production delays, product mix, cancellation or rescheduling of orders, new product announcements by competitors, receipt of FDA clearances or approvals by the Company or its competitors, notices of product suspension or recall, the Company's ability to manage product transitions, sales prices and market conditions. In addition, if the Company expands or augments its manufacturing capabilities in connection with the introduction of new products, quarterly revenues and operating results are expected to fluctuate to an even greater degree. Uncertain Ability to Meet Capital Needs The Company will require substantial additional funds for its research and development programs, preclinical and clinical testing, development of its sales and distribution force, operating expenses, regulatory processes and manufacturing and marketing programs. The Company's capital requirements will depend on numerous factors, including the progress of its research and development programs, results of preclinical and clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, developments and changes in the Company's existing research, licensing and other relationships and the terms of any new collaborative, licensing and other arrangements that the Company may establish. The Company believes its available short-term assets and investment income will be sufficient to meet its operating expenses and capital expenditures through the next 12 months. However, the Company's cash requirements may vary materially from those now planned due to potential future acquisitions, class action and patent litigation, the progress of research and development programs, results of clinical testing, relationships with strategic partners, if any, competitive and technological advances, the FDA and foreign regulatory processes and other factors. There can be no assurance, however, that additional financing will be available when needed, or if available, will be available on acceptable terms. Insufficient funds may prevent the Company from implementing its business strategy or may require the Company to delay, scale back or eliminate certain of its research and product development programs or to license to third parties rights to commercialize products or technologies that the Company would otherwise seek to develop itself. Possible Volatility of Stock Price The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Common Stock. In addition, the market price of the Common Stock has been and is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, the commencement or major developments in litigation, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or its competitors, changes in health care policy in the United States and internationally, changes in analysts' recommendations regarding the Company, other medical companies or the medical laser industry generally and general market conditions may have a significant effect on the market price of the Company's Common Stock. Product Liability Exposure The sale of the Company's medical products involves the inherent risk of product liability claims against the Company. The Company currently maintains product liability insurance coverage in the amount of $5 million per occurrence and $5 million in the aggregate, but such insurance is expensive, subject to various coverage exclusions and may not be obtainable by the Company in the future on terms acceptable to the Company. There can be no assurance that claims against the Company arising with respect to its products will be successfully defended or that the insurance carried by the Company will 30 be sufficient to cover liabilities arising from such claims. A successful claim against the Company in excess of the Company's insurance coverage could have a material adverse effect on the Company. Limitations on Third Party Reimbursement The Company's laser systems and other products are generally purchased by physicians, dentists and surgical centers which then bill various third party payors, such as government programs and private insurance plans, for the procedures conducted with these products. Third-party payors carefully review and are increasingly challenging the prices charged for medical products and services. Reimbursement rates from private companies vary depending on the procedure performed, the third-party payor, the insurance plan and other factors. Medicare reimburses hospitals a prospectively-determined fixed amount for the costs associated with an in-patient hospitalization based on the patient's discharge diagnosis, and reimburses physicians a prospectively- determined fixed amount based on the procedure performed, regardless of the actual costs incurred by the hospital or physician in furnishing the care and unrelated to the specific devices used in that procedure. Third-party payors are increasingly scrutinizing whether to cover new products and the level of reimbursement for covered products. While the Company believes that the laser procedures using its products have generally been reimbursed, payors may deny coverage and reimbursement for the Company's products if they determine that the device was not reasonable and necessary for the purpose for which used, was investigational or not cost-effective. As a result, there can be no assurance that reimbursement from third party payors for these procedures will be available or if available, that reimbursement will not be limited, thereby adversely affecting the Company's ability to sell its products on a profitable basis. Moreover, the Company is unable to predict what legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislature or regulation may have on the Company. Uncertainties Regarding Health Care Reform Several states and the United States government are investigating a variety of alternatives to reform the health care delivery system and further reduce and control health care spending. These reform efforts include proposals to limit spending on health care items and services, limit coverage for new technology and limit or control the price health care providers and drug and device manufacturers may charge for their services and products. If adopted and implemented, such reforms could have a material adverse effect on the Company's business, financial condition and results of operations. Shares Eligible for Future Sale; Effect of Outstanding Options and Warrants Sales of a substantial number of shares of Common Stock in the public market could adversely affect the market price for the Common Stock. Substantially all of the Company's shares of Common Stock outstanding as of the date hereof are freely tradeable, subject to compliance with Rule 144 promulgated under the Securities Act. As of the date hereof, in excess of 7,000,000 shares of Common Stock are issuable upon the full exercise of the Company's outstanding Class B Warrants, and in excess of five million shares of Common Stock are issuable upon exercise of other outstanding warrants and options. The existence of the Company's outstanding warrants and options could adversely affect the Company's ability to obtain future financing. The price which the Company may receive for the Common Stock issued upon exercise of such options and warrants will likely be less than the market price of the Common Stock at the time such options and warrants are exercised. Moreover, the holders of the options and warrants might be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain needed capital by a new offering of its securities on terms more favorable than those provided for by the options and warrants. 31 Potential Anti-Takeover Effects of Preferred Stock The Company's Articles of Incorporation authorize the issuance of 8,850,000 shares of "blank check" preferred stock, which will have such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock. In the event of such issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. In March 1998 the Company adopted a Shareholder Rights Plan, pursuant to which certain shareholders of the Company are entitled to purchase Series A Junior Participating Preferred Stock of the Company at the price stated in the plan. These rights are not exerciseable until certain events involving the acquisition by a person or affiliated group of 15% or more of the Company's outstanding shares of common stock, or the commencement or announcement of a tender offer or exchange offer which would result in the acquisition of 15% or more of the Company's outstanding shares. A copy of the Shareholder Rights Plan is available from the Company. The Shareholder Rights Plan may have the effect of discouraging, delaying or preventing a change of control of the Company. Item 2. Properties. Executive Offices and Manufacturing Facilities The Company leases approximately 28,000 square feet in one facility in Irvine, California pursuant to a lease which expires in December 2000. This facility contains the Company's executive offices, service center and manufacturing space. The Company is required to lease an additional 13,000 square feet in the same facility commencing in January 1999, or on such earlier date that the adjoining tenant's lease terminates. The Company also leases an additional 4,700 square foot facility in Irvine, under a lease that expires October 31, 1998. While the Company believes that its manufacturing and administrative facilities are adequate to satisfy the Company's needs through at least 2000, it may need to lease additional clean room facilities in the future. OIS Facilities OIS leases, under a triple net lease, approximately 13,875 square feet of office, manufacturing, and warehouse space in Sacramento, California under a lease which terminates June 30, 1998. After that date, OIS expects to continue to occupy these premises under a month-to-month arrangement. Management believes that its existing facilities are suitable and adequate to meet its current needs. Item 3. Legal Proceedings. Fiber Litigation In March 1994, the Company instituted litigation (the "Fiber Litigation") in the U.S. District Court, Central District of California, against Infrared Fiber Systems, Inc., a Delaware corporation ("IFS") which contracted to supply optical fiber to the Company for the Company's Er:YAG laser. Two of IFS's senior officers are also named as defendants. The Company's complaint in this matter alleges that IFS and two of its officers made misrepresentations to the Company and that IFS breached its agreement to supply fibers and certain warranties concerning the quality of the fiber to be provided. The Company is seeking damages and an injunction requiring IFS to subcontract the production of optical fiber to a third party, as provided in the supply agreement. In April 1994, IFS filed a general denial and a cross-complaint against the Company alleging breach of contract and intentional interference with prospective economic advantage, seeking compensatory damages "in excess of $500,000," punitive damages and a judicial declaration that the contract has been terminated and that IFS is free to market 32 its fibers to others. In September 1996, IFS filed a new cross-complaint alleging the same causes of action and seeking substantially the same relief in the Orange County California Superior Court. The Company has filed an answer to the complaint, denying the allegations and asserting several affirmative defenses. IFS has agreed to license certain fiber technologies, to which the Company claims exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of the Company. Coherent joined the above federal litigation on behalf of IFS, seeking a declaration that IFS had the legal right to enter into this license and supply the fiber covered by that agreement, and then subsequently filed a new complaint in the Orange County California Superior Court for declaratory relief, seeking an order that the Company's original agreement with IFS applies only to a specific type of optical fiber. The Company has answered this complaint. Premier and IFS have reached an agreement in principle to settle the litigation between them and are in the process of preparing a written settlement agreement. Although Premier is hopeful that the formal settlement agreement will be successfully negotiated, no assurance can be given that the agreement will actually be completed. The settlement agreement under discussion does not terminate the litigation as between Premier and Coherent. In May 1995, the Company instituted litigation concerning this dispute in the Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit described above and interfered with the Company's contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995, the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by the Company in the federal action. In July 1996, the court in the California state court action granted demurrers by Westinghouse and the employee of Westinghouse to all causes of action against them, as well as all but one of the Company's claims against Coherent. As a result, the claims that were the subject of the granted demurrers have been dismissed, subject to the Company's right to appeal. The Company has filed an appeal of these decisions as they relate to Westinghouse and the Westinghouse employee, and briefs have been submitted. No date has been set for a hearing of this appeal. No trial date has been set as to the remaining outstanding causes of action. Securities Class Action On May 1, 1998, a class action suit (the "Valenti Litigation") was commenced in the United States District of Court for the Central District of California pursuant to federal securities laws on behalf of purchasers of the Company's securities during the period from February 12, 1998 through April 15, 1998. The complaint alleges that the Company and certain of its officers and directors violated the federal securities laws by issuing false and misleading statements and omitting material facts regarding the Company's financial results and operations during such period. Among other things, the complaint alleges that the defendants materially misstated the Company's financial results for the fiscal quarter ended December 31, 1998 and that as a result of such misstatements, the plaintiff suffered damages as a result of a decrease in the market price of the Company's publicly traded securities. After the filing of such complaint, a number of similar complaints have also been filed in the United States District Court for the Central District of California, seeking certification as class actions, and covering class periods commencing as early as May 7, 1997. Such complaints alleged facts similar to those described above with respect to the Valenti Litigation, as well as allegations that the Company artificially inflated the price of its outstanding publicly traded securities as a result of misrepresentations relating to the market and prospects for sale of its Centauri Er:YAG laser. All of the above described complaints seek monetary damages in unspecified amounts, together with attorneys fees, interest, costs and related remedies. 33 The Company presently intends to seek to have all of such securities class action lawsuits consolidated into a single action. The Company has also been named as a nominal defendant in a shareholder derivative lawsuit filed in the Orange County, California Superior Court, in a case captioned Eskeland vs. Cozean, et al. The complaint was filed by a ------------------- shareholder of the Company, on behalf of the Company, against certain of the Company's officers and directors, including Colette Cozean, Michael Hiebert, Richard Roemer, Ronald Higgins, Patrick Day, Grace Chin-Hsin Lin, G. Lynn Powell, and E. Donald Shapiro. The complaint alleges, among other things, that such persons violated their fiduciary duty to the Company by exposing the Company to liability under the securities laws, failing to ensure that the Company maintained adequate accounting controls, and related alleged actions and omissions. Although the Company is a named defendant, the lawsuit seeks to recover damages from the individual defendants on behalf of the Company. Accordingly, it is not clear whether the Company will have any liability or incur any material loss as a result of being named as a defendant in this matter. Investigations and Other Matters The Company has been notified that the Securities and Exchange Commission ("SEC") and the Nasdaq Stock Market have instituted investigations concerning matters pertaining to the Company's revenue reporting practices, and related management issues. The Company is cooperating with both the SEC and the Nasdaq Stock Market in connection with these investigations. These investigations, the Company believes, generally relate to whether the Company, in SEC filings and press releases issued prior to the end of the 1998 fiscal year, properly recognized revenues for transactions occurring during fiscal 1997, and at interim periods in fiscal 1998. To date, the SEC has not indicated that it is seeking to impose any penalties on the Company or that it is made any specific findings with respect to the Company's accounting practices. However, the Nasdaq Stock Market has notified the Company that it intends to delist the Company's securities from the Nasdaq Stock Market, as a result of the Company's failure to file with the SEC a complete Annual Report on Form 10-K for the fiscal year ended March 31, 1998, and as a result of concerns relating to its investigation of the Company's accounting practices. The Company has filed an appeal of this action. The Company is also involved in various disputes and other lawsuits from time to time arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of the IFS litigation, securities class actions, disputes and other lawsuits may adversely affect the Company. OIS Litigation On September 6, 1996, an action was filed in Superior Court in the County of Sacramento, California against OIS by a former employee alleging that such employee was wrongfully terminated by OIS in retaliation for filing a grievance against a co-employee for harassment and creation of a hostile work environment. The suit, which is still pending, seeks, among other things, lost wages, $150,000 in compensatory damages, and punitive damages. OIS believes that this action is without merit and intends to defend this action vigorously. On or about August 17, 1997, the Company was advised that JB Oxford & Company ("JBO"), one of several market makers in OIS's common shares which trade over the counter on the Nasdaq Small-Cap Market, was being investigated by the SEC. In connection with this investigation, OIS, and Mr. Verdooner, in his capacity as Chief Executive Officer of OIS, were served by the SEC with a subpoena on or about August 18, 1997. These subpoenas require the submission to the SEC of various documents, predominantly relating to JBO. OIS is cooperating with the SEC investigation of JBO. OIS does not believe that it is a subject of such SEC inquiries. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters that were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 34 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Class A Common Stock and Class B Warrants are listed on the Nasdaq National Market under the symbols "PLSIA" and "PLSIZ," respectively. Prior to January 6, 1998, Class A Warrants outstanding which were listed on the Nasdaq National Market and the symbol "PLSIW," and "Units," each consisting of one share of Class A Common Stock, one Class A Warrant and one Class B Warrant, were listed on the Nasdaq SmallCap Market. The Class A Warrants were redeemed by the Company pursuant to the terms of the Warrant Agreement on January 6, 1998, and as a result there have no outstanding Class A Warrants or Units since that date. Trading of the Company's Class A Common Stock and Class B Warrants was suspended by the Nasdaq Stock Market on May 26, 1998, when the Company's former auditors withdrew their audit opinion on the 1997 fiscal year. The Company is presently discussing with the Nasdaq Stock Market the conditions, if any, under which such suspension may be terminated so that trading may resume. The following table sets forth, for the quarters indicated, the high and low closing sale prices per share of the Common Stock and Class B Warrants as reported on the Nasdaq National Market.
Class A Class B Common Stock Warrants ------------------ ---------------- High Low High Low -------- ------- ------- ------ Fiscal Year Ended March, 31, 1997: First Quarter........................ 10 3/4 8 3 5/8 2 1/8 Second Quarter....................... 9 6 1/8 2 3/4 1 3/8 Third Quarter........................ 7 7/8 5 2 1/16 13/16 Fourth Quarter....................... 8 1/8 5 3/16 1 11/16 27/32 Fiscal Year Ended March 31, 1998: First Quarter........................ 14 5 1/4 5 3/4 3/4 Second Quarter....................... 11 17/32 8 1/2 3 27/32 2 5/16 Third Quarter........................ 10 3/8 7 3/16 3 1 3/16 Fourth Quarter....................... 11 11/16 7 11/16 3 7/8 1 5/8
On May 22, 1998, the last day prior to suspension of trading, the last reported sale price for the Company's Common Stock and Class B Warrants on the Nasdaq National Market was $4 3/16 and $13/16, respectively. As of June 25, 1998, the approximate number of holders of record of the Common Stock, Class B Warrants, Class E-1 Common Stock and Class E-2 Common Stock were 825, 32, 326 and 326, respectively. There is no public market for the Company's Class E-1 and Class E-2 Common Stock. The Company has not paid dividends and does not anticipate declaring dividends on its Common Stock in the foreseeable future. 35 ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA (HISTORICAL) The following table contains certain selected consolidated financial data of the Company and is qualified by the more detailed financial statements and notes thereto of the Company included herein. The balance sheet and statement of operations data for the periods ended March 31, 1994, 1995 and 1996 have been derived from the Company's financial statements, audited by Price Waterhouse LLP, independent accountants. The report of Price Waterhouse LLP with respect to such financial statements contains an explanatory paragraph that describes uncertainty as to the ability of the Company to continue as a going concern. The selected financial data for the years ended March 31, 1997 and 1998 were derived from the Company's financial statements audited by Haskell & White LLP. The following information should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
FISCAL YEAR ENDED MARCH 31, ----------------------------------------------------------------------- 1994 1995 1996 1997 1998 (Restated) ----------- ----------- ----------- ------------ ------------ SELECTED STATEMENT OF OPERATIONS DATA: Net sales............................................. $ 2,079,335 $ 1,249,403 $ 1,704,390 $ 5,090,861 $ 10,417,841 Cost of sales......................................... 1,753,352 1,298,420 3,324,757 3,648,539 17,394,290 ----------- ----------- ----------- ----------- ------------ Gross profit (loss)..................................... 325,983 (49,017) (1,620,367) 1,442,322 (6,976,449) Selling and marketing expenses........................ 1,087,461 1,035,863 1,308,767 2,415,010 5,398,162 Research and development expenses..................... 678,279 1,035,705 1,213,471 1,563,228 3,378,600 General and administrative expenses................... 1,322,888 1,747,090 1,709,327 2,050,184 3,941,456 Write-off of investment in Mattan..................... -- -- -- 881,010 -- Termination of strategic alliance with IBC............ -- -- -- 331,740 -- In-process research and development acquired in connection with business acquisitions............ -- -- -- 250,000 12,800,000 Merger related and integration costs.................. -- -- -- -- 7,616,924 ----------- ----------- ----------- ----------- ------------ Loss from operations.................................. (2,762,645) (3,867,675) (5,851,932) (6,048,850) (40,111,591) Interest (expense) income............................. (434,851) (322,540) 99,037 15,493 1,073,493 Minority interest in loss of consolidated subsidiary.......................................... -- -- -- 60,000 273,811 ----------- ----------- ----------- ----------- ------------ Loss before extraordinary items........................ (3,197,496) (4,190,215) (5,752,895) (5,973,357) (38,764,287) Extraordinary gain from extinguishment of indebtedness. -- 381,730 -- -- -- ----------- ----------- ----------- ----------- ------------ Net loss................................................ $(3,197,496) $(3,808,485) $(5,752,895) $(5,973,357) $(38,764,287) =======================================================================
36
FISCAL YEAR ENDED MARCH 31, ----------------------------------------------------------------------- 1994 1995 1996 1997 1998 Restated ----------- ----------- ----------- ----------- ------------ SELECTED PER SHARE DATA: Loss per share before extraordinary item /1/..... $ (2.45) $ (1.59) $ (1.26) $ (1.02) $ (3.39) Extraordinary gain from extinguishment of indebtedness.................................... -- .15 -- -- -- ----------- ----------- ----------- ----------- ------------ Net loss per share............................... $ (2.45) $ (1.44) $ (1.26) $ (1.02) $ (3.39) =========== =========== =========== =========== ============ Weighted average shares outstanding/2/............ 1,288,751 2,584,722 4,556,959 5,833,326 11,444,123 AT MARCH 31, ----------------------------------------------------------------------- 1994 1995 1996 1997 1998 Restated ----------- ----------- ----------- ----------- ------------ SELECTED BALANCE SHEET DATA: Cash and cash equivalents........................ $ 308,764 $ 5,888,237 $ 35,463 $ 173,610 $ 9,722,514 Working capital.................................. 1,287,587 6,756,149 5,818,492 7,526,260 19,016,787 Total assets..................................... 12,325,029 16,883,975 15,674,568 21,079,336 47,708,420 Long-term debt /3/............................... 4,303,890 -- -- -- -- Shareholders' equity............................. 6,022,174 15,002,260 13,797,046 16,248,710 31,456,453
- ----------------- /1/ The effect on net loss per common share of the conversion of the Company's debentures was to reduce historical net loss by $37,500 and $67,995 and to increase weighted average shares outstanding by 76,875 shares and 321,099 shares for the fiscal years ended March 31, 1994 and 1995, respectively. Net loss per common share was computed based on the weighted average number of the Company's common shares outstanding during the fiscal years ended March 31, 1995 and 1994 after giving retroactive adjustment for recapitalization and conversion of debentures into Units upon completion of the Company's initial public offering. /2/ Does not include shares of Class E-1 or Class E-2 Common Stock, which are subject to cancellation in certain circumstances. /3/ Amounts for long-term debt at March 31, 1994 include $285,000 in mandatorily redeemable warrants. 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following discussion and analysis should be read in conjunction with the Company's Financial Statements and related notes thereto appearing elsewhere in this Report. This Report contains forward-looking statements including, without limitation, statements concerning future cost of sales, which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in these forward-looking statements. GENERAL The Company develops, manufactures and markets several lines of proprietary medical lasers, fiber optic delivery systems and associated products for a variety of dental, ophthalmic and surgical applications. The Company commenced operations in August 1991, after acquiring substantially all of the assets of Pfizer Laser Systems ("Pfizer Laser"), a division of Pfizer HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets acquired by the Company included the proprietary rights to a broad base of laser and fiber optic technologies developed by Pfizer Laser. This acquisition was led by the Company's current Chief Executive Officer. Since its formation and until its initial public offering in December 1994, the Company principally focused on, and its research and development activities related to, growing markets in dentistry, ophthalmology, cosmetic procedures and certain surgical specialties to be used in surgical centers and medical offices. To implement this strategy, the Company developed the Pegasus Nd:YAG dental laser system from existing technology and introduced this laser to the dental market in February 1992. In June 1993, the Company introduced the Centauri Er:YAG laser for ophthalmology and initiated clinical trials for hard tissue procedures in dentistry. In December 1993, the Company acquired from Proclosure certain technology, assets and proprietary rights relating to a 1.32 Nd:YAG laser system for tissue melding. From its formation in 1991 through its initial public offering, the Company developed and received regulatory approvals for 15 models of lasers and sold certain of those products for soft tissue applications in dentistry and as part of clinical trials conducted by third parties. After the Company's initial public offering in December 1994 (the "IPO"), the Company increased its inventory, acquired the distribution rights to two new dental lasers and, in December 1995, expanded its dental sales force. In September and November 1995, the Company acquired rights to market and distribute the Arago and MOD argon lasers, respectively, for dental applications, and in February 1996, the Company introduced and began shipping its Aurora diode laser for soft tissue dental applications. The Company completed a secondary offering in October 1996. In 1997, it formed a joint venture named "Data.Site," with Kansas City-based Refractive Surgical Services for the purposes of providing ophthalmic data collection and outcomes analysis. 38 In September 1997, the Company acquired EyeSys Technologies, Inc., which is a leading developer and supplier of corneal topography (diagnostic imaging) systems with an installed base of more than 3,500 systems worldwide. The Company continued its expansion into diagnostic imaging by acquiring a controlling interest (51%) in Ophthalmic Imaging Systems during the final four months of fiscal 1998. While the Company has received FDA clearance to market laser products covering a variety of medical applications, to date the Company has focused its research, development and marketing efforts on a limited number of products or applications (principally specific dental and more recently, ophthalmic applications). As future resources permit, the Company may introduce certain products for applications for which it already has all necessary approvals or may seek strategic alliances to develop, market and distribute such products. The Company has recorded operating losses in each of the fiscal years since its formation, resulting principally from substantial costs incurred in research and development activities and obtaining regulatory approvals, together with the absence of significant revenues to date and limited commercial sales of its products. Although sales increased significantly during fiscal 1998, operating results worsened due to the impacts of expensed business acquisition costs and a failed distribution agreement. As discussed in Note 6 to the accompanying financial statements, the Company and certain of its officers and directors have been named in a number of securities class action lawsuits which allege violations of the Securities Exchange Act or the California Corporations Code. The Company has also been named in a shareholders' derivative action. Any significant uninsured judgment or settlement amount associated with these claims would seriously affect the Company's ability to satisfy its working capital requirements. The Company has not prepared a formal assessment of the internal and external Year 2000 issues that would have a significant impact on its computerized accounting systems and products. However, based upon a preliminary review, management believes that the costs of upgrading the internal operating systems will be minimal because a "third party, commercially available" software package is used and an upgrade to a Year 2000 compliant release is planned for fiscal year 1999. Additionally, the Company's laser products are not date sensitive. Diagnostic products, on the other hand, contain date sensitive data bases. The Company's internal software engineers are developing a plan to have a test version of the new software available by mid-1999. The costs of software modification are not expected to be material. Any diagnostic products currently in the market that are covered by a warranty will be upgraded at no charge to the customer. The Company plans to charge upgrade fees for previously sold products that are outside of the warranty period. The Company expects that its existing warranty reserves will be adequate to absorb the upgrade costs. Results of Operations Fiscal Year ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997 Net sales increased 105% to $10,418,000 for the year ended March 31, 1998 ("fiscal 1998") from $5,091,000 for the year ended March 31, 1997 ("fiscal 1997"). This increase was primarily attributable to an increase in sales to the dental market including sales resulting from the introduction of the Er:YAG laser for cavity preparation and ophthalmic sales from the EyeSys product line during the latter half of fiscal 1998. Dental sales during the last two quarters of fiscal 1998 were adversely affected by an impasse reached with dental distributor Henry Schein, Inc. ("Schein") over the nature of a relationship between the parties initiated with a letter of intent executed in December 1997. The Company believed that Schein obligated itself to accept an initial shipment of product, and that the relationship was being expanded. Schein subsequently notified the Company that it did not agree with the Company's understanding of the terms of the relationship. Sales during the last two quarters of fiscal 1997 were also adversely affected by a disruption in the supply of the Company's Arago argon laser and vendor supply problems with the MOD argon laser. Cost of sales increased 377% to $17,394,000 in fiscal 1998 from $3,649,000 in fiscal 1997, due to an increase in sales, excess inventory reserves of $7,500,000 associated with the failure of the Schein relationship, substantially higher warranty costs, and start-up and training expenses associated with Er:YAG laser and fiber and EyeSys product manufacture. Selling and marketing expenses increased 124% to $5,398,000 in fiscal 1998 from $2,415,000 in fiscal 1997. This increase was primarily attributable to significant increases in marketing personnel, introduction of the Er:YAG laser, increased commissions and associated selling expenses, and from consolidation of the expenses of new subsidiaries. Research and development ("R&D") expenses increased 116% to $3,379,000 in fiscal 1998 from $1,563,000 39 in fiscal 1997. This increase resulted primarily from increases in the Company's research and development personnel, an additional $510,000 of clinical trial costs and associated samples, travel expenditures for the Company including EyeSys, and $710,000 of expense for all other new subsidiaries. The expense in fiscal 1997 is offset by a $450,000 payment received by the Company under a Small Business Innovative Research ("SBIR") grant. The Company also recognized $225,000 and $190,000 as a research and development expense from the issuance of stock options to clinical evaluators and medical directors in fiscal 1998 and fiscal 1997 respectively. General and administrative expenses increased 71% to $3,941,000 in fiscal 1998 from $2,050,000 in fiscal 1997. This increase was partially due to $459,000 of expenses from new subsidiaries, $400,000 for litigation expense related to a supply agreement for optical fibers, and $250,000 for issuance of stock options. Net interest income increased to $1,073,000 in fiscal 1998 from $15,000 in fiscal 1997. This increase reflected the Company's higher cash balances following the completion of its secondary offering in October 1996 and warrant call in January 1998 (the net proceeds from these capital stock transactions were $10,401,000 and $41,735,000 respectively). In fiscal 1998 the Company expensed $12,800,000 for in process R&D and $7,065,000 in merger and integration costs related to acquisitions of 51% ownership in Ophthalmic Imaging Systems (OIS) and 100% of EyeSys Technologies (EyeSys). Approximately $180,000 of losses were attributable to the minority shareholder interest of OIS. However 100% of the loss was absorbed by the Company due to the capital deficiency position of OIS. The Company recorded $349,000 of losses attributable to the minority shareholder interest of Data.Site compared with $60,000 during 1997. In summary, the operating results for 1998 were negatively impacted by $19,900,000 of acquisition expenses (including $16,500,000 of non-cash costs), $7,500,000 of inventory write-downs, $1,100,000 of warranty cost, $480,000 of non-cash stock option expense, bad debt expense of $600,000, and litigation costs of $400,000. Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996 The Company's independent auditors unexpectedly resigned during May 1998 and withdrew their opinion on the Company's fiscal year 1997 financial statements. Accordingly, it became necessary to retain new auditors to re- examine the 1997 financial statements. Because of the extended period of time that had passed since the issuance of the prior report, a number of matters were identified of which the Company was not aware when it initially issued the 1997 financial statements. Although the Company believes that the initially issued 1997 financial statements were not materially misstated in terms of net loss, total assets and shareholders' equity, the statements have nonetheless been restated in the interest of full disclosure. The following discussion is based upon the restated amounts. Net sales increased 199% to $5,091,000 for the year ended March 31, 1997 ("fiscal 1997") from $1,704,000 for the year ended March 31, 1996 ("fiscal 1996"). This increase was primarily attributable to an increase in sales to the dental market of the Aurora diode laser and argon lasers which were introduced in the latter half of fiscal 1996. Ophthalmic sales also increased significantly as the Er:YAG laser was purchased by key ophthalmic industry leaders in several countries. Sales during the last two quarters of fiscal 1997 were adversely affected by a disruption in the supply of the Company's Arago argon laser and vendor supply problems with the MOD argon laser. Cost of sales increased 10% to $3,649,000 in fiscal 1997 from $3,325,000 in fiscal 1996, due to an increase in sales. Cost of sales as a percentage of net sales decreased due to reduced material costs, manufacturing efficiencies, the ability to spread fixed indirect costs over a larger revenue base, and favorable warranty experience. Selling and marketing expenses increased 85% to $2,415,000 in fiscal 1997 from $1,309,000 in fiscal 1996. This increase was primarily attributable to increased commissions and associated selling expenses, expenses associated with attendance at two ophthalmic shows and from the consolidation of the Company's expenses with those of Data.Site. 40 Research and development expenses increased 29% to $1,563,000 in fiscal 1997 from $1,213,000 in fiscal 1996. This increase resulted primarily from increases in research and development personnel at the Company, partially offset by a $450,000 payment received by the Company under a Small Business Innovative Research ("SBIR") grant. The Company also recognized $190,000 as a research and development expense from the issuance of stock options to clinical evaluators and medical directors. General and administrative expenses increased 20% to $2,050,000 in fiscal 1997 from $1,709,000 in fiscal 1996. This increase was the combined result of higher bad debts expense and additional expenses from the consolidation of Data.Site. Net interest income decreased to $15,000 in fiscal 1997 from $99,000 in fiscal 1996. This reduction reflected the Company's limited cash balances prior to the completion of its secondary offering in October 1996. In fiscal 1997, the Company wrote off its investment in Mattan of $881,000 when the Mattan shares ceased being traded on the public market. In addition, the Company expensed $250,000 of in-process research and development incurred in connection with the formation of Data.Site. During fiscal year 1997 the Company also wrote off $332,000 as a settlement of its joint marketing relationship with International Biolaser Corporation ("IBC") since it is unlikely that IBC will repay its debt to the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have been financed through the proceeds from the sale of the Company's equity securities, including an initial public offering in December 1994, a secondary public offering in October 1996, voluntary exercise of warrants and a warrant call in January 1998, revenues from operations and the proceeds from an SBIR grant. The Company's principal capital requirements include the financing of inventory, accounts receivable, research and development activities, the development of an ophthalmic and a surgical sales force, the development of marketing programs and the acquisition and/or licensing of patents. At March 31, 1998, the Company had unrestricted cash and short-term investments totalling $19,389,000 and its working capital was $19,017,000 compared with $4,142,000 and $7,526,000 respectively, at March 31, 1997. These increases resulted principally from the 1998 warrant call offset by cash used in operations and costs of business acquisitions. At March 31, 1998, the Company's indebtedness consisted of a $1,935,000 balance on its Silicon Valley Bank line of credit and $133,000 on the OIS Imperial Bank line of credit. 41 The Company's Credit Facility with Silicon Valley Bank permits borrowings of up to $2,100,000. Borrowings under the Credit Facility are secured by a Certificate of Deposit pledged to Silicon Valley Bank by the Company pursuant to a Pledge Agreement and bear an interest rate equal to the prime rate of interest, as announced by Silicon Valley Bank, and are due and payable on September 24, 1998. In connection with the Credit Facility, the Company issued to the lender warrants to purchase up to 9,756 shares of the Company's Class A Common Stock at an exercise price equal to $10.25 per share. At March 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes totaling approximately $37.4 million which will begin to expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions which may limit the net operating loss carryforwards available for use in any given year if certain events occur, including significant changes in stock ownership. Utilization of the Company's net operating loss carryforwards to offset future income may be limited. During fiscal 1998, the Company received approximately $41,735,000 from the exercise of options and warrants. As a result of such exercises, the Company issued an additional 4,176,000 Class B Warrants and 6,270,000 shares of Class A Common Stock. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development activities, the scope and results of preclinical studies and clinical trials, the costs and timing of regulatory approvals, the rate of technology advances by the Company, competitive conditions within the medical laser industry, the establishment of manufacturing capacity and the establishment of collaborative marketing and other relationships which may either involve cash infusions to the Company, or require additional cash from the Company. The Company's ability to meet its working capital needs will be dependent on its ability to achieve a positive cash flow from operations and profitable operations, in addition to its ability to secure additional debt or equity financing. No assurance can be given that the Company will be able to achieve a positive cash flow from operations, profitable operations or secure financing on acceptable terms. GOVERNMENT GRANTS The Company has been awarded a SBIR grant for approximately $750,000 for the study of laser cataract emulsification. Substantially all of this grant has been drawn for such purposes. The remainder of the grant can be drawn over the next six months upon the achievement of specified criteria. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements, including notes thereto, at March 31, 1998 and 1997 and for the years ended March 31, 1998, 1997 and 1996 follow. 42 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Premier Laser Systems, Inc. We have audited the accompanying consolidated balance sheets of Premier Laser Systems, Inc. as of March 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years then ended. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2, the Company has restated its previously issued 1997 consolidated financial statements. In our opinion, the 1998 and 1997 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Premier Laser Systems, Inc. at March 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. HASKELL & WHITE LLP Newport Beach, California August 19, 1998 Except for Note 10 as to which the date is August 26, 1998 43 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Shareholders of Premier Laser Systems, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Premier Laser Systems, Inc. at March 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP Costa Mesa, California May 17, 1996 44 PREMIER LASER SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31 --------------------------- 1998 1997 (Restated) ------------ ------------ ASSETS Current assets: Cash and cash equivalents..................... $ 9,722,514 $ 173,610 Short-term investments........................ 9,666,918 3,968,288 Restricted cash............................... 2,150,000 1,050,000 Accounts receivable, net of an allowance for doubtful accounts of $1,224,845 and $613,263 in 1998 and 1997, respectively............... 4,952,892 1,052,312 Inventories..................................... 4,482,698 3,284,632 Prepaid expenses and other current assets....... 2,528,996 774,319 ------------ ------------ Total current assets............................ 33,504,018 10,303,161 Property and equipment, net..................... 1,778,423 780,945 Intangible assets, net.......................... 11,991,679 9,988,753 Other assets.................................... 434,300 6,477 ------------ ------------ Total assets.................................... $ 47,708,420 $ 21,079,336 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 5,510,692 $ 1,305,256 Line of credit.................................. 2,068,163 800,000 Accrued compensation and related costs.......... 964,691 318,000 Other accrued liabilities....................... 5,943,685 353,645 ------------ ------------ Total current liabilities....................... 14,487,231 2,776,901 Commitments and contingencies Minority interest............................... 1,764,736 2,053,725 Shareholders' equity Preferred stock, no par value: Authorized shares--8,850,000 Issued and outstanding shares--none -- -- Common stock, Class A, no par value: Authorized shares--35,600,000 Issued and outstanding shares - 14,649,421 at March 31, 1998 and 7,313,841 at March 31, 1997.............................. 83,546,913 27,320,449 Common stock, Class E-1, no par value: Authorized shares--2,200,000 Issued and outstanding shares - 1,257,461 at March 31, 1998 and 1,257,178 at March 31, 1997.............................. 4,769,878 4,769,878 Common stock, Class E-2, no par value: Authorized shares--2,200,000 Issued and outstanding shares - 1,257,461 at March 31, 1998 and 1,257,178 at March 31, 1997.............................. 4,769,878 4,769,878 Warrants and options......................... 1,723,842 3,978,276 Accumulated deficit.......................... (63,354,058) (24,589,771) ------------ ------------ Total shareholders' equity...................... 31,456,453 16,248,710 ------------ ------------ Total liabilities and shareholders' equity...... $ 47,708,420 $ 21,079,336 ============ ============
See accompanying notes. 45 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED MARCH 31 ------------------------------------------- 1998 1997 1996 (Restated) ----------- ----------- ----------- Net sales.......................................... $ 10,417,841 $ 5,090,861 $ 1,704,390 Cost of sales...................................... 17,394,290 3,648,539 3,324,757 ------------ ----------- ----------- Gross profit (loss)................................ (6,976,449) 1,442,322 (1,620,367) Selling and marketing expenses..................... 5,398,162 2,415,010 1,308,767 Research and development expenses.................. 3,378,600 1,563,228 1,213,471 General and administrative expenses................ 3,941,456 2,050,184 1,709,327 Write off of investment in Mattan Corporation...... ---- 881,010 ---- Termination of strategic alliance with IBC......... ---- 331,740 ---- In-process research and development acquired in connection with business acquisitions........... 12,800,000 250,000 ---- Merger related and integration costs............... 7,616,924 ---- ---- ------------ ----------- ----------- Loss from operations............................... (40,111,591) (6,048,850) (5,851,932) Interest income, net............................... 1,073,493 15,493 99,037 Minority interest in loss of consolidated subsidiary...................................... 273,811 60,000 ------------ ----------- ----------- Net loss........................................... $(38,764,287) $(5,973,357) $(5,752,895) ============ =========== =========== Net loss per share, basic and diluted.............. $ (3.39) $ (1.02) $ (1.26) ============ =========== =========== Shares used in computation of net loss per share... 11,444,123 5,833,326 4,556,959 ============ =========== ===========
See Accompanying Notes. 46 Premier Laser Systems, Inc. Consolidated Statements of Shareholders' Equity For the years ended March 31, 1998, 1997 and 1996
Common Stock Common Stock Common Stock Class A Class E-1 Class E-2 --------------------------- -------------------------- ------------------------ Class A Shares Amount Shares Amount Shares Amount Warrants ------------ ----------- ----------- ----------- ------------ ---------- ------------- Balance at March 31, 1995.... 4,501,899 $15,436,178 1,256,549 $4,769,820 1,256,549 $4,769,820 $ 2,321,057 Common stock issued for investment in Mattan....... 200,000 881,010 -- -- -- -- -- Exercise of stock options... 304 188 269 58 269 58 -- Increase in unrealized holding gain on short-term investments................ -- -- -- -- -- -- -- Net loss.................... -- -- -- -- -- -- -- ------------ ------------ ----------- ----------- ----------- ----------- ------------ Balance at March 31, 1996.... 4,702,203 16,317,376 1,256,818 4,769,878 1,256,818 4,769,878 2,321,057 Common stock and B warrants issued in connection with secondary public offering................... 2,403,500 9,363,298 -- -- -- -- -- Common stock issued in connection with the formation of the Data.Site joint venture.............. 159,787 1,200,000 -- -- -- -- -- Exercise of stock options and warrants.................... 48,351 249,774 360 -- 360 -- (25,729) Stock options issued to Advisory Board members, clinical evaluators and medical directors........... -- 190,001 -- -- -- -- -- Decrease in unrealized holding gain on short-term investments................. -- -- -- -- -- -- -- Net loss (restated).......... -- -- -- -- -- -- -- ------------ ------------ ----------- ----------- ----------- ----------- ------------- Balance at March 31, 1997 (restated).................. 7,313,841 27,320,449 1,257,178 4,769,878 1,257,178 4,769,878 2,295,328 Common stock and options issued in connection with business acquisitions....... 1,065,266 11,757,426 -- -- -- -- -- Exercise of stock options and warrants.................... 6,270,314 43,989,418 283 -- 283 -- (2,295,328) Stock options issued to Advisory Board members, clinical evaluators, medical directors and other consultants................. -- 479,620 -- -- -- -- -- Net loss..................... -- -- -- -- -- -- -- ------------ ------------ ----------- ----------- ----------- ----------- ------------- Balance at March 31, 1998.... 14,649,421 $ 83,546,913 1,257,461 $ 4,769,878 1,257,461 $ 4,769,878 $ -- ============ ============ =========== =========== =========== =========== ============= See accompanying notes. Common Unrealized Class B Stock Holding Accumulated Warrants Warrants Gains Deficit Total ----------- ----------- ---------- ------------ ----------- Balance at March 31, 1995.... $ 376,774 $ 192,130 $ -- ($12,863,519) $15,002,260 Common stock issued for investment in Mattan....... -- -- -- -- 881,010 Exercise of stock options... -- -- -- -- 304 Increase in unrealized holding gain on short-term investments..... -- -- 3,666,367 -- 3,666,367 Net loss.................... -- -- -- (5,752,895) (5,752,895) ----------- ----------- ---------- ------------ ----------- Balance at March 31, 1996.... 376,774 192,130 3,666,367 (18,616,414) 13,797,046 Common stock and B warrants issued in connection with secondary public offering................... 1,037,514 -- -- -- 10,400,812 Common stock issued in connection with the formation of the Data.Site joint venture.............. -- -- -- -- 1,200,000 Exercise of stock options and warrants.................... 76,530 -- -- -- 300,575 Stock options issued to Advisory Board members, clinical evaluators and medical directors........... -- -- -- -- 190,001 Decrease in unrealized holding gain on short-term investments...... -- -- (3,666,367) -- (3,666,367) Net loss (restated).......... -- -- -- (5,973,357) (5,973,357) ----------- ----------- ---------- ------------ ----------- Balance at March 31, 1997 (restated)................... 1,490,818 192,130 -- (24,589,771) 16,248,710 Common stock and options issued in connection with business acquisitions...... -- -- -- -- 11,757,426 Exercise of stock options and warrants............... 40,894 -- -- -- 41,734,984 Stock options issued to Advisory Board members, clinical evaluators, medical directors and other consultants........... -- -- -- -- 479,620 Net loss..................... -- -- -- (38,764,287) (38,764,287) ----------- ----------- ---------- ------------ ----------- Balance at March 31, 1998.... $ 1,531,712 $ 192,130 $ -- ($63,354,058) $31,456,453 =========== =========== ========== ============ ===========
See accompanying notes. 47 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31 1998 1997 1996 (Restated) Operating Activities Net loss............................................................. $(38,764,287) $(5,973,357) $(5,752,895) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................................... 1,637,941 841,467 814,401 Write off of investment in Mattan Corporation.................... 881,010 -- Acquired in-process research and development..................... 12,800,000 250,000 -- Minority interest in loss of consolidated subsidiary............. (273,811) (60,000) Non-cash component of merger related and integration costs....... 2,332,238 Stock options issued to Advisory Board members and consultants... 479,620 190,001 -- Termination of strategic alliance with IBC....................... -- 125,000 -- Changes in operating assets and liabilities: Accounts receivable............................................. (2,253,457) (539,045) (244,467) Inventories..................................................... 392,992 (1,099,277) (14,665) Prepaid expenses and other current assets....................... (1,555,257) (342,438) (110,565) Accounts payable................................................ 2,190,093 (184,769) 594,654 Accrued liabilities............................................. 4,882,097 319,936 (598,847) ------------ ----------- ----------- Net cash used in operating activities................................ (18,131,831) (5,591,472) (5,312,384) ------------ ----------- ----------- Investing Activities Purchase of short-term investments................................... (5,698,630) (3,968,288) -- Patent expenditures.................................................. (87,989) (178,139) (195,971) Business acquisitions................................................ (5,002,172) (96,028) -- Purchase of property and equipment................................... (888,294) (24,477) (219,723) Note receivable pursuant to strategic alliance with IBC.............. -- -- (125,000) Other................................................................ (410,179) -- -- ------------ ----------- ----------- Net cash used in investing activities................................ (12,087,264) (4,266,932) (540,694) ------------ ----------- ----------- Financing Activities Proceeds from equity offerings....................................... -- 10,400,812 -- Net borrowings (repayments) under line of credit..................... (695,340) 800,000 -- Proceeds from exercise of stock options and warrants................. 41,734,984 300,575 304 Increase in restricted cash.......................................... (1,100,000) (1,050,000) -- Other................................................................ (171,645) (454,836) -- ------------ ----------- ----------- Net cash provided by financing activities............................ 39,767,999 9,996,551 304 ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents................. 9,548,904 138,147 (5,852,774) Cash and cash equivalents at beginning of year....................... 173,610 35,463 5,888,237 ------------ ----------- ----------- Cash and cash equivalents at end of year............................. $ 9,722,514 $ 173,610 $ 35,463 ============ =========== =========== Supplemental disclosures of cash flow information Cash paid for interest............................................... $ 120,000 $ 115,283 $ 52,129
See accompanying notes. 48 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements March 31, 1998 1. Organization and Nature of Operations Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and commenced operations in August 1991 after acquiring substantially all of the assets and certain liabilities of Pfizer Laser Systems (Pfizer), a division of Pfizer Hospital Products Group, Inc. The Company designs, develops, manufactures and markets several lines of lasers for surgical and other medical purposes, laser waveguides and fiber optic devices, disposables and associated accessory products for the medical and dental market. The Company also designs, develops, manufactures and markets digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company has suffered recurring losses from operations and may continue to incur losses for the foreseeable future due to the significant costs anticipated to be incurred in connection with manufacturing, marketing and distributing its laser and imaging products. In addition, the Company intends to conduct continuing research and development activities, including regulatory submittals and clinical trials to develop additional applications for its technology. The Company operates in a highly competitive environment and is subject to all of the risks inherent in a new business enterprise. During 1996 the Company completed a public offering of its securities which generated net proceeds aggregating $10.4 million. Proceeds of $41,735,000 were generated by fiscal 1998 capital transactions. As discussed in Note 6, the Company has been named in class action lawsuits alleging violations of federal and state securities laws. The Company believes that its present liquid assets will be sufficient to meet its working capital requirements through at least fiscal 1999. Any significant uninsured judgment or settlement amount associated with the class action litigation would seriously affect the Company's ability to satisfy its working capital requirements. 2. Summary of Significant Accounting Policies Restatement of Amounts Previously Reported The Company's independent auditors unexpectedly resigned during May 1998 and withdrew their opinion on the Company's fiscal year 1997 financial statements. Accordingly, it became necessary to retain new auditors to re-examine the 1997 financial statements. Because of the extended period of time that had passed since the initial report was issued, a number of matters were identified of which the Company was not aware when it initially issued the 1997 financial statements. Although the Company believes that the initially issued 1997 financial statements were not materially misstated in terms of net loss, total assets and shareholders' equity, the statements have nonetheless been restated in the interest of full disclosure. The following is a summary of the impact of the restatement on the 1997 consolidated statement of operations. 1. Reduction of previously reported sales, net of related cost of sales $(280,000) 2. Revision to inventory valuation allowances 160,000 3. Additional bad debts expense (313,000) 4. Minority interest in loss of consolidated subsidiary 60,000 5. Other, net (10,000) --------- Net increase in 1997 loss $(383,000) =========
The effects on the Company's previously issued 1997 financial statements are summarized as follows:
Previously Increase Reported (Decrease) Restated ----------- ---------- ----------- Consolidated balance sheet as of March 31, 1997: Current assets $10,658,161 $ (355,000) $10,303,161 Other assets 8,662,450 2,113,725 10,776,175 ----------- ---------- ----------- Total assets $19,320,611 $1,758,725 $21,079,336 =========== ========== =========== Current liabilities $ 2,688,901 $ 88,000 $ 2,776,901 Minority interest -- 2,053,725 2,053,725 Net shareholders' equity 16,631,710 (383,000) 16,248,710 ----------- ---------- ----------- Total liabilities and shareholders' equity $19,320,611 $1,758,725 $21,079,336 =========== ========== =========== Consolidated Statement of Operations Net sales $ 5,530,861 $ (440,000) $ 5,090,861 Cost of sales 3,968,539 (320,000) 3,648,539 ----------- ---------- ----------- Gross profit 1,562,322 (120,000) 1,442,322 Selling and marketing expenses 2,406,010 9,000 2,415,010 General and administrative expenses 1,736,184 314,000 2,050,184 All other expenses 3,025,978 -- 3,025,978 ----------- ---------- ----------- Loss from operations (5,605,850) (443,000) (6,048,850) Interest income, net 15,493 -- 15,493 Minority interest in loss of consolidated subsidiary -- 60,000 60,000 ----------- ---------- ----------- Net loss $(5,590,357) $ (383,000) $(5,973,357) =========== ========== =========== Net loss per share $ (0.96) $ (0.07) $ (1.02) =========== ========== ===========
49 Revenue Recognition Revenues are recognized when products are shipped to customers. Allowances for returns are provided based upon actual experience and identified risks. Short-Term Investments and Restricted Cash The Company invests excess cash in United States Treasury securities and commercial paper generally with maturities of less than one year. Short-term investments with a maturity of less than three months when purchased are classified as cash equivalents. Investments with maturities in excess of three months are presented as short-term investments in the accompanying financial statements. Pursuant to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company's short-term investments are classified as available-for-sale and are reported at fair market value with unrealized gains and losses reflected as an adjustment to shareholders' equity. There were no material unrealized gains or losses at March 31, 1997 or 1998. Restricted cash consists of certificates of deposits held to secure borrowings under the Company's line of credit, and is classified as a current asset since it is collateral for a current liability. Concentration of Credit Risk and Foreign Sales The Company generates revenues principally from sales in the medical field. As a result, the Company's accounts receivable are concentrated primarily in this industry. In addition, sales to one customer represented 10% of 50 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) the Company's sales in fiscal 1996. Sales in foreign countries accounted for approximately 13%, 25% and 40% of the Company's total sales in fiscal 1998, 1997 and 1996, respectively. These foreign sales related almost entirely to sales in Asia and Europe. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Generally, letters of credit are obtained on international sales. The Company maintains reserves for potential credit losses. Long Lived Assets In fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS No. 121). The adoption of SFAS No. 121 had no impact on the Company's financial position or results of operations during 1997 or 1998. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market, and are comprised of the following at March 31:
3/31/98 3/31/97 ------------ ----------- Raw materials......................... $ 5,980,793 $ 2,042,100 Work-in-process....................... 1,313,974 101,802 Finished goods........................ 5,876,710 2,344,054 ----------- ----------- 13,171,477 $ 4,487,956 Less: Reserve for slow- moving inventory and excess purchase commitments.................. (8,688,779) (1,203,324) ----------- ----------- $ 4,428,698 $ 3,284,632 =========== ===========
Property and Equipment Property and equipment are stated at cost. Expenditures for replacements and improvements are capitalized and expenditures for repairs and maintenance are charged to operating expense as incurred. Property and equipment consist of the following at March 31:
1998 1997 ----------- ------------ Machinery, equipment, molds and tooling.... $ 1,948,560 $ 1,041,574 Furniture, fixtures and office equipment... 3,004,906 596,347 Software................................... 375,000 250,000 ----------- ----------- 5,328,466 1,887,921 Less accumulated depreciation.............. (3,550,043) (1,106,976) ----------- ----------- $ 1,778,423 $ 780,945 =========== ===========
51 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Depreciation of furniture, machinery and equipment is calculated on a straight-line basis over the following estimated useful lives: Machinery and equipment................ 5-10 years Furniture and fixtures................. 10 years Software............................... 3 years Leasehold improvements................. Shorter of estimated useful life or term of lease Intangible Assets Intangible assets consist primarily of patents and technology rights, goodwill and license agreements. The costs assigned to acquired intangible assets, partially based upon independent appraisals, are being amortized on a straight-line basis over the estimated useful lives of the assets ranging from 2 to 15 years. Intangibles consist of the following at March 31:
1998 1997 ----------- ----------- Patents and technology rights... $13,062,710 $ 9,581,230 Goodwill........................ 2,839,570 3,156,004 License agreements.............. 110,000 265,000 ----------- ----------- 16,012,280 13,002,234 Less accumulated amortization... (4,020,601) (3,013,481) ----------- ----------- $11,991,679 $ 9,988,753 =========== ===========
Research and Development Costs Research and development costs are expensed as incurred. A substantial portion of the Company's research and development expense is related to developing new products, improving existing products or processes, and clinical research programs. The Company enters into agreements with certain doctors to exchange a portion of a product's sales price for services related to the completion of certain portions of clinical studies necessary for obtaining product approval from the U.S. Food and Drug Administration. Typically, the amounts consist of a portion of the product sales price which is equal to the cost of the services to be rendered by the doctor. Pursuant to the agreements, in the event the doctor is unable to complete the agreed upon clinical study, the doctor is required to remit a cash payment for the entire amount. The amounts are capitalized as prepaid clinical testing expense and are amortized upon completion of certain milestones of the clinical study. These studies are generally completed within one year. Clinical testing expenses included in prepaid expenses totaled $6,000, $405,000 and $204,000 at March 31, 1998, 1997 and 1996, respectively. 52 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Income Taxes The Company accounts for income taxes in accordance with statement of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes. SFAS 109 requires the liability method of accounting for income taxes. No credits for tax benefits have been recognized, since realization of them is not reasonably assured. (See Note 7). Statements of Cash Flows The Company invests its excess cash in money market funds. The Company considers all highly liquid investments with an original maturity of three months or less and money market funds to be cash equivalents. Significant noncash investing and financing activities excluded from the accompanying statements of cash flows are as follows: In fiscal 1996, the Company issued 200,000 shares of Class A common stock in connection with the acquisition of 1,150,000 shares of Mattan Corporation's common stock. The value of the Mattan Corporation common stock shares was $881,010 on the date of the transaction. Concurrent with the completion of the Company's initial public offering, certain notes payable to shareholders totaling $66,500 and convertible debentures totaling $1,500,000, plus related accrued interest, were converted into 7,072 shares of Class A common stock and 6,260 shares of each Class E-1 and E-2 common stock, and 321,099 Units, respectively. In fiscal 1998 and 1997, the Company issued Class A common stock valued at $11,757,426 and $1,200,000 respectively, in connection with business acquisitions. Net Loss Per Share Net loss per share has been computed based on the weighted average number of the Company's common shares outstanding during each presented period and excludes all shares of Class E-1 and Class E-2 common stock, outstanding or subject to option, because all such shares of stock are subject to escrow and the conditions for the release of shares from escrow have not been satisfied. Common stock equivalents were not considered in the net loss per share calculation because the effect would be antidilutive. In February 1997, Statement of Financial Accounting Standards No. 128, Earnings Per Share was issued and is effective for interim and annual periods ending after December 15, 1997. The statement requires presentation of both basic and diluted earnings per share. As of the result of the Company's net loss, basic and diluted loss per share do not differ materially from the per share amounts previously reported for fiscal years 1997 and 1996. Accounting for Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock option grants. Options granted to consultants and other non-employees are accounted for under the fair value method in accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based Compensation. 53 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates and assumptions include inventory valuation and the realizability of certain intangible assets. The Company's inventory and intangibles largely relate to technologies which have yet to gain widespread market acceptance. Inventory reserves have been established based upon sales forecasts and the Company believes that no further losses will be incurred on the disposition of its inventory and that the remaining economic life of the Company's tangible assets is reasonable. If wide-spread market acceptance of the Company's products is not achieved, the carrying amount of inventory and intangible assets could be materially affected. Conversely, better than expected sales could yield improved margins. Basis of Presentation Certain prior year amounts have been reclassified in order to conform with the current year presentation. 3. Business Acquisitions Effective January 31, 1997, the Company entered into a joint venture with Refractive Surgical Services, LLC (RSS), a Kansas City based company engaged in the development of certain medical outcomes software. Under this joint venture, the Company and RSS formed Data.Site. LLC, ("Data.Site"). Data.Site acquired and assumed substantially all of the assets and liabilities of RSS. The Company acquired a 51 percent interest in Data.Site, which was accounted for under the purchase method of accounting, and issued 159,787 shares of its Class A common stock to RSS. In connection with the acquisition the Company recorded goodwill in the amount of $2,893,179 and a minority interest of $2,113,725. The Company has funded Data.Site's operations with an additional $1,135,919 in cash or equivalent services through March 31, 1998. As of March 31, 1998, RSS owed the Company $266,000. On September 30, 1997, the Company acquired all of the equity interests of EyeSys Technologies, Inc. (EyeSys), a manufacturer and distributor of a specialized line of diagnostic ophthalmic equipment, for approximately $12.5 million, in the form of 1,236,668 shares of the Company's common stock (including 319,684 are being held in an escrow account pending the outcome of certain warranties to be determined at the end of 12 and 18 months), and $470,000 in cash. 216,761 of the escrowed shares have been excluded from the determination of the purchase price. If and when they are released, the allocation of the adjusted purchase price will be re-assessed. Options to purchase 210,000 shares of the Company's common stock were also issued in connection with the acquisition. These options were valued in accordance with SFAS 123 and included in the acquisition cost. The acquisition was accounted for as a purchase and the total acquisition cost allocated among net liabilities assumed ($2,183,429), intangibles ($2,600,000), and in process research and development ($9,200,000). Merger related and integration expenses ($2,147,224) were also recorded as of the acquisition date. EyeSys has been consolidated commencing with the acquisition date. Goodwill arising from the acquisition ($2,298,784) was written-off due to uncertainty as to its recoverability. During the final four months of fiscal 1998 the Company acquired a controlling interest in Ophthalmic Imaging Systems, Inc. ("OISI") for $3.3 million in cash. OISI is engaged in the business of designing, developing, manufacturing and marketing digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. Equity accounting was used during the period in which the Company owned at least 20% but less than 50% of the OISI stock (December 1997 through February 1998). Commencing with the 54 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 3. Business Acquisitions (Continued) date at which the controlling interest was obtained (late February 1998), OISI has been consolidated with the Company in the accompanying financial statements. The OISI acquisition has been accounted for as a purchase and the total acquisition cost allocated among net liabilities of OISI ($996,835), intangibles ($1,687,407) and in process research and development ($2,600,000). Merger related and integration expenses of $1,687,407 were also recorded as of the date at which the controlling interest was obtained. The Company is in the process of negotiating an agreement for the purchase of the minority interests of OISI. The following unaudited pro forma consolidated results of operations give effect to the EyeSys and OISI acquisitions as if they had occurred at the beginning of fiscal 1998 and 1997: 1998 ------------ Net sales............................. $ 17,975,000 Net loss.............................. (42,885,000) Net loss per share.................... (3.58) The unaudited pro forma information is not necessarily indicative of the combined results of operations that would have occurred during the periods presented nor for future results of operations. During fiscal 1998 three other business acquisitions occurred, which were not individually or collectively significant to the financial condition or operating results of the Company. 4. Grants In September 1995, the Company obtained a Small Business Innovative Research Grant totaling approximately $750,000 for the study of laser emulsification. Pursuant to the terms of the grant, the Company is eligible to receive reimbursement for research and development costs incurred in connection with the laser emulsification study up to $750,000 upon the achievement of certain milestones, as defined. During fiscal 1997 and 1996, the Company received approximately $450,000 and $250,000 under the grants, respectively. The amounts received under the grant were offset against research and development costs incurred in the study. 5. Lines of Credit The Company has a credit facility with a bank which provides for borrowings of up to $2,100,000. As of March 31, 1998, total borrowings under this agreement were $1,936,000, bearing interest at the bank's prime rate (8.50% at March 31, 1998). Borrowings under the agreement are secured by a certificate of deposit. The agreement expires in September 1998. The Company's OISI subsidiary has an accounts receivable financing agreement which allows for advances of up to 80% of eligible accounts, with a maximum limit of $960,000. As of March 31, 1998, $132,634 was outstanding under that agreement. 55 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 56 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 6. Commitments and Contingencies Commitments The Company leases its facilities and certain equipment under noncancellable operating leases. Total rental expense for operating leases was $251,000, $296,000 and $348,000 for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. At March 31, 1998, future minimum lease payments under noncancellable operating leases are as follows: 1999.................................... $ 238,644 2000.................................... 245,412 2001.................................... 187,866 ---------- $ 671,922 ========== Pursuant to the Company's facility lease, effective January 1997, the Company becomes guarantor of a lease agreement between the Company's lessor and a third party lessee. The guaranteed future minimum lease payments relating to the third party are $86,000 for the year ended March 31, 1999. Litigation The Company entered into an agreement with Infrared Fiber Systems, Inc. (IFS), as a supplier of certain fiber optics that expires in the fiscal year ending March 31, 2002. The agreement requires the supplier to sell exclusively to the Company fiber optics for medical and dental applications as long as the Company purchases defined minimum amounts. In March 1994, the Company initiated litigation against IFS. The Company's complaint alleges that IFS and two of its officers misrepresented IFS' ability to supply optical fibers, and that IFS breached its supply agreement and certain warranties. In April 1994, IFS filed a cross-complaint alleging breach of contact and intentional interference with prospective economic advantage, seeking declaratory relief that the contract has been terminated and that IFS is free to market its fiber optics to others. In July 1994, Coherent, Inc., a major shareholder of IFS and a manufacturer of medical lasers which employ IFS optical fibers, joined the lawsuit for the express purpose of defending their rights to the IFS optical fibers. In May 1995, the Company instituted litigation concerning this dispute in Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit and interfered with the Company's contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995 the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by the Company in the federal action. In July 1996, the court in the California state court action granted demurrers by Westinghouse and the employee of Westinghouse to all causes of action against them, as well as all but one of the Company's claims against Coherent. As a result, the claims that were the subject of the granted demurrers have been dismissed, subject to the Company's right to appeal. The Company has filed an appeal of these decisions as they relate to Westinghouse and the Westinghouse employee, and briefs have been submitted. No date has been set for a hearing of this appeal. No trial date has been set as to the remaining outstanding causes of action. 57 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) Litigation (Continued) The Company and certain of the officers and directors have been named in a number of securities class action lawsuits which allege violations of the Securities Exchange Act or the California Corporations Code. The plaintiffs seek damages on behalf of classes of investors who purchased the Company's stock between May 7, 1997 and April 15, 1998. The complaints allege that the Company misled investors by failing to disclose material information and making material misrepresentations regarding the Company's business operations and projections. The Company has also been named in a shareholder derivative action purportedly filed on its behalf against certain officers and directors arising out of the same alleged facts. Although the Company intends to vigorously defend itself in the actions, the ultimate outcome is uncertain and no provision for any settlement has been reflected in the accompanying financial statements. Any significant adverse resolution of the actions would seriously impact the Company's financial condition. The Company maintains insurance coverage for these types of actions and has filed claims with the carrier. The policy has a limit of $5 million and a $250,000 deductible amount. The Company is involved in various other disputes and lawsuits arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of these disputes and other lawsuits may adversely affect the Company, however, it is the opinion of management, that the outcome of such other matters will not have a material adverse impact on the Company's financial position, results of operations, or cash flows. 7. Income Taxes The Company has incurred operating losses since its inception and as a result, no provision for or benefit from income tax has been recorded. Deferred tax assets consist of the following at March 31:
1998 1997 ----------- ----------- Tax operating loss carryforwards.......................... $14,502,970 $ 7,116,277 Inventory and receivable reserves and related temporary differences.............................................. 1,705,050 1,115,696 Depreciation and amortization............................. 890,215 705,293 Research and development credit carryforwards............. 424,494 349,494 Accruals not currently deductible......................... 193,255 70,687 ----------- ----------- Total deferred tax assets................................. 17,715,984 9,357,447 Valuation allowance for deferred tax assets............... (17,715,984) (9,357,447) ----------- ----------- Net deferred taxes........................................ $ -- $ -- =========== ===========
The Company has approximately $39 million of federal net operating loss carryforwards at March 31, 1998 ($19 million for state purposes), which will begin to expire in 2006. A valuation allowance has been established for the entire deferred tax asset. The Tax Reform Act of 1986 contains provisions which could substantially limit the availability of the net operating loss carryforwards if there is a greater than 50% change in ownership during a three year period. As a result of the Company's public offerings the Company experienced an ownership change of more than 50%, resulting in a limitation on the utilization of their net operating loss carryforwards. The limitation is based on the value of the 58 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) 7. Income Taxes (Continued) Company on the date that the change in ownership occurred. The ultimate realization of the loss carryforwards is dependent on the future profitability of the Company. 8. Shareholders' Equity Initial and Secondary Public Offerings On December 7, 1994, the Company completed an initial public offering of 2,400,000 Units of the Company's securities, each unit consisting of one share of Class A common stock, one redeemable Class A warrant and one redeemable Class B warrant (the Units). The Company realized net proceeds of $9,542,000 from this offering. Each Class A warrant consists of the right to purchase one share of Class A common stock and one Class B warrant through November 30, 1999 at an exercise price of $6.50. Each Class B warrant consists of the right to purchase one share of Class A common stock at an exercise price of $8.00. The Company has the right to redeem the Class A and Class B warrants after November 30, 1997 at a price of $.05 per warrant subject to certain conditions regarding the bid price of the Class A common stock. On January 12, 1995, the underwriter in the initial public offering exercised its over allotment option to purchase 360,000 Units at the public offering price, resulting in additional net proceeds of $1,411,000. On October 18, 1996, the Company completed a public offering of 11,000 Units of the Company's securities, each Unit consisting of 190 shares of Class A common stock and 95 redeemable Class B warrants (the "Units"). The Company realized net proceeds of $10,401,000 from this offering and the related exercise of the underwriters over allotment option. Each Class B warrant consists of the right to purchase one share of Class A common stock through November 30, 1999 at an exercise price of $8.00. During fiscal 1998, the Company received approximately $41,735,000 from the exercise of options and warrants. As a result of such exercises, the Company issued an additional 4,176,000 Class B Warrants and 6,270,000 shares of Class A Common Stock. Stock Options The Company has adopted several stock option plans that authorize the granting of options to employees, officers and/or consultants to purchase shares of the Company's Class A common stock. The stock option plans are administered by the Board of Directors or a committee appointed by the Board of Directors, which determines the terms of the options, including the exercise price, the number of shares subject to option and the exercisability of the option. The options are generally granted at the fair market value of the shares underlying the options at the date of the grant and expire within ten years of the grant date. In addition to options granted pursuant to the stock option plans, the Company has issued options to purchase shares of the Company's Class A common stock to certain members of the Board of Directors, consultants and former notes payable holders. 59 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) Stock Options (Continued) The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its employee stock option grants. Accordingly, no compensation expense has been recognized for its employee stock option awards and its employee stock purchase plan because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant. The Company recognizes expense related to grants of options to non-employees in accordance with the fair value provision of SFAS No. 123. Such expense was $479,620 in 1998, $190,001 in 1997 and none during 1996. Additional option expense of $1,110,904 was recorded in 1998 in connection with the EyeSys acquisition. That amount is included in merger related and integration costs in the accompanying consolidated statement of operations. FASB Statement No. 123, Accounting for Stock-Based Compensation, requires pro forma information regarding net income (loss) and net income (loss) per share using compensation that would have been incurred if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of options granted have been estimated at the date of grant using a Black-Scholes option pricing model using the following assumptions:
1998 1997 -------- -------- Risk free interest rate................. 6.0% 6.0% Stock volatility factor................. 0.64 0.58 Weighted average expected option life... 4 years 4 years Expected dividend yield................. 0% 0%
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's compensation expense used in determining the pro forma information ($1,947,458, $974,469, and $367,490 for fiscal years 1998, 1997 and 1996, respectively) may not be indicative of such expense in future periods as the 1997 and 1996 amounts are based only on option grants after December 15, 1994. Proforma information is as follows:
1998 1997 1996 ----------- ----------- ----------- Pro forma net loss............. $(40,711,745) $(6,947,826) $(6,135,000) Pro forma net loss per share... $ (3.56) $ (1.19) $ (1.35)
A summary of the Company's stock option activity, and related information for the years ended March 31 follows (excluding option grants that are subject to shareholder approval):
1998 1997 1996 ----------------------- ------------------------ ----------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- --------- --------- --------- --------- --------- Outstanding--beginning of year.......... 2,308,049 5.51 1,423,949 $ 5.58 788,157 $6.14 Granted................................. 1,899,500 9.22 1,042,756 6.16 704,700 4.89 Exercised............................... (395,271) 6.20 (1,899) 1.00 (1,722) 1.00 Forfeited............................... (325,609) 8.40 (156,757) 10.53 (67,186) 4.96 --------- --------- --------- ------ --------- ----- Outstanding--end of year................ 3,486,669 6.84 2,308,049 5.51 1,423,949 5.58 ========= ========= ========= ====== ========= ===== Exercisable at end of year.............. 1,707,502 6.33 775,629 5.18 782,999 6.15 Weighted-average fair value of options granted during the year............ $4.73 $ 2.98 $2.46 ===== ====== =====
60 Premier Laser Systems, Inc. Notes to Consolidated Financial Statements (Continued) Stock Options (Continued) The weighted average remaining contractual life of options as of March 31, 1998 was as follows:
Outstanding Exercisable -------------------------------------- ---------------------------- Weighted-Average Weighted- Number of Remaining Weighted Average Shares Contractual Life Average Exercise Shares Exercise Range of Exercise Prices Outstanding (years) Price Exercisable Price - ------------------------ ----------- ---------------- ---------------- ----------- --------- $1.00....................... 26,038 5 $1.00 26,038 $1.00 $4.50 - $8.85............... 2,415,971 8 5.87 1,323,971 5.31 Greater than $10.00......... 1,044,660 9 10.24 357,493 10.53
Class E-1 and Class E-2 Common Stock The Company's Class E-1 and Class E-2 common stock is held in escrow, is not transferable, can be voted and will be converted into Class A common stock only upon the occurrence of specified events. All of the Class E-1 common stock will be automatically converted into Class A common stock in the event that the Company's net income before provision for income taxes, as defined, exceeds certain amounts. These amounts were originally $8,425,000 and $9,900,000 for the fiscal years ending March 31, 1999 and 2000, respectively, but these amounts will be increased in future fiscal years in proportion to increases in the weighted average number of shares of common stock outstanding (as defined) in the relevant year, as compared to the number of shares outstanding immediately after the Company's initial public offering. In addition, the Class E-1 common stock will be converted if the closing price, as defined, of the Company's Class A common stock shall average in excess of $19.25 for any 30 consecutive trading days during the period May 1, 1996 to November 30, 1997. If none of the above events occur, the Class E-1 common stock will be canceled on June 30, 2000. All of the Class E-2 common stock will be automatically converted into Class A common stock in the event that: (1) the Company's net income before provision for income taxes, as defined, amounts to at least $14,750,000, $20,475,000 or $26,750,000 for the years ending March 31, 1998 through 2000, respectively, (which amounts shall be adjusted in the same manner as those for the Class E-1 common stock) or (2) the closing price, as defined, of the Company's Class A common stock shall average in excess of $24.00 for any 30 consecutive trading days during the period May 1, 1996 to November 30, 1997. If none of the above events occur, the Class E-2 common stock will be canceled on June 30, 2000. The Company will, in the event of the release of the Class E-1 and Class E- 2 common stock, recognize during the period in which the earnings thresholds are met or such minimum bid prices are achieved, a substantial noncash charge to earnings equal to the fair value of such shares on the date of their release, which would have the effect of significantly increasing the Company's loss or reducing or eliminating earnings, if any, at such time. 9. Employee Benefit Plan The Company adopted a Defined Contribution 401(k) Profit Sharing Plan, effective January 1, 1997 covering substantially all of its employees. The Plan permits eligible employees to contribute a portion of their compensation to the Plan, on a tax deferred basis. The Company may make matching contributions, in amounts determined by the Company's Board of Directors. The Company's contributions are in the form of shares of the Company's common stock. During 1997, no amounts were contributed by the Company to the Plan. For 1998, 3,752 shares have been approved for contribution by the Company. 61 10. Subsequent Event Premier entered into a Stock Purchase Agreement, dated February 25, 1998, pursuant to which it agreed, subject to certain conditions, to commence an exchange offer to acquire all of the outstanding common stock of OIS not owned by Premier. This Stock Purchase Agreement was terminated as of August 21, 1998. In connection with this termination, Premier may be liable to pay OIS a $500,000 break-up fee, which could be satisfied by the reduction of indebtedness of OIS to Premier which arose after March 31, 1998. In addition, in purchasing 51% of OIS' outstanding stock, Premier entered into an agreement with one of OIS' selling shareholders which contemplates that Premier's purchase of approximately 10% of OIS' outstanding shares will be rescinded if Premier does not complete the exchange offer. If the rescission is implemented, Premier will own less than a majority of the outstanding shares of OIS and would no longer include the financial performance of OIS on a consolidated basis. In addition, as part of the rescission, Premier would receive approximately $730,000 in cash. The parties are currently negotiating various issues relating to the termination of the Purchase Agreement and their future business relationship. The consolidated balance sheet at March 31, 1998 includes current assets of $1,897,000, total assets of $2,348,000, current liabilities of $3,320,000 and accumulated deficit of $369,000, as a result of consolidating the assets and liabilities of OIS. The consolidated statement of operations for the year ended March 31, 1998, includes sales of $356,000 and net loss of $369,000 as a result of consolidating the operations of OIS for the portion of the year for which Premier owned a controlling interest in OIS. 62 Schedule II--Valuation and Qualifying Accounts Years ended March 31, 1998, 1997 (Restated) and 1996
Balance at Deductions/ Balance beginning Recoveries at end of Description of period Additions and Write-offs Other* period - ----------- ----------- --------- --------------- --------- ---------- 1998 Allowance for doubtful accounts receivable...................... $ 613,263 $385,407 $(149,801) $375,976 $1,224,845 Inventory reserves................ 1,203,324 5,704,455 -- 1,781,000 8,688,779 1997 Allowance for doubtful accounts receivable...................... $ 154,677 $403,515 $(119,054) $174,125 $ 613,263 Inventory reserves................ 950,325 252,999 -- -- 1,203,324 1996 Allowance for doubtful accounts receivable...................... $ 306,428 $254,962 $(406,713) $ -- $ 154,677 Inventory reserves................ 699,269 838,968 (587,912) -- 950,325
- -------------------------- * Allowance amounts added in connection with business acquisitions. 63 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. On June 1, 1998, the Company filed a Current Report on Form 8-K, reporting a change in its certifying accountant. This Current Report was amended on June 15, 1998. In connection with the resignation of the Company's former accountants, there was a disagreement between the Company and the former accountants concerning certain accounting matters. Reference is hereby made to such Current Reports for further discussion of this matter. On June 22, 1998, the Company engaged the firm of Haskell & White LLP as its certifying accountant. The engagement of Haskell & White LLP was reported in a Current Report on Form 8-K filed June 26, 1998. 64 PART III Item 10. Directors and Officers of the Registrant. The directors and executive officers of the Company and their ages as of March 31, 1998 are as follows:
Name Age Position ---- --- -------- Colette Cozean, Ph.D..... 40 Chairman of the Board, Chief Executive Officer, President and Director T. Daniel Caruso, Jr..... 55 Executive Vice President, Mergers and Acquisitions Michael L. Hiebert (1)... 35 Vice President, Finance and Chief Financial Officer Tom Hazen................ 56 Executive Vice President, Operations J. Randy Alexander (2)... 53 Executive Vice President, Strategic Business Judith A. McCall......... 57 Vice President, Human Resources, Administration and Special Projects and Secretary Jeffrey A. Anderson...... 31 Vice President, Regulatory Affairs and Quality Assurance Patrick J. Day........... 71 Director (3) Grace Ching-Hsin Lin..... 48 Director (3)(4) G. Lynn Powell, D.D.S.... 57 Director (4) E. Donald Shapiro........ 66 Director (3)(4)
____________________ (1) Subsequent to March 31, 1998, Mr. Hiebert resigned as Vice President, Finance and Chief Financial Officer. (2) Subsequent to March 31, 1998, Mr. Alexander's employment with the Company was terminated. (3) Member of the Audit Committee. (4) Member of the Compensation Committee. All directors hold office until the next Annual Meeting of Shareholders or the election and qualification of their successors. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The business experience, principal occupations and employment, as well as periods of service, of each of the directors and executive officers of the Company during at least the last five (5) years are set forth below. Directors and Officers Colette Cozean, Ph.D. is a founder of the Company and has been Chairman of the Board of Directors, President and Director of Research of the Company since it began operations in August 1991 and became the Chief Executive Officer in 1994. From April 1987 to August 1991, Dr. Cozean served as Director of Research and Development, Regulatory Affairs and Clinical Programs at Pfizer Laser and in such capacities managed the development of the laser technologies which were acquired by the Company from Pfizer Laser. Prior to April 1987, Dr. Cozean held various research positions at Baxter Edwards, a division of Baxter Healthcare Corporation ("Baxter"), and American Technology and Ventures, a division of American Hospital Supply Company ("American Hospital"). Baxter and American Hospital are manufacturers and suppliers of advanced medical products. Dr. Cozean holds several patents, has published many articles and has served as a member of the National Institutes of Health grant review committee. Dr. Cozean holds a Ph.D. in biomedical engineering and an M.S. in 65 Electrical Engineering from Ohio State University, a B.S. in biomedical engineering from the University of Southern California, and a B.A. in physical sciences from Westmont College. T. Daniel Caruso, Jr. was appointed to the office of Executive Vice President, Mergers and Acquisitions in April 1998. Prior to such time, Mr. Caruso served as Senior Vice President of Sales and Marketing and from July 1992 to May 1996 served as Vice President, Sales and Marketing. Michael L. Hiebert has been the Company's Vice President, Finance and Chief Financial Officer since November 1996. Prior to joining the Company, Mr. Hiebert was the controller and director of management information systems and business analysis of Urethane Technologies, Inc., a plastics manufacturer, which position he held from 1994 to 1996. From 1992 to 1994, Mr. Hiebert was Vice President, Finance and Administration of Active Organics, Inc., a cosmetics manufacturer, and from 1987 to 1992 he was an accounting manager with the general engineering firm of C. A. Rasmussen, Inc. Tom Hazen has been the Executive Vice President, Operations of the Company since October 1997. Prior to joining the Company and since 1992, Mr. Hazen served as Vice President of Operations of Imagyn Medical, Inc. In addition, Mr. Hazen has served in various executive offices with several companies in the medical field specializing in product development and manufacturing. Such positions include Vice President Operations at MICA Technology Services in Buffalo Grove, Illinois and President and Chief Executive Officer of California based Dolphin Imaging Systems. Mr. Hazen received a BSME degree from the University of Arizona and an MBA from UCLA. J. Randy Alexander joined the Company in February 1998 as the Executive Vice President, Strategic Business. Since 1989 and prior to joining the Company, Mr. Alexander served in various positions with Chiron Vision, including Vice President of Sales and Marketing, President of U.S. Operations and Senior Vice President of Business and Technology Development. Mr. Alexander holds a M.S. in Biological Sciences and a B.S. in Biological Sciences from Marshall University in West Virginia. Judith A. McCall has been with the Company since April 1993 and became Vice President, Human Resources, Administration and Special Projects and Secretary in January 1998. For the past three years, Ms. McCall has headed the Company's human resources department. Prior to joining the Company, Ms. McCall held various senior operations and administrative positions with firms in Southern California and served as Director of Training and Development for API Security. Ms. McCall received a M.A. in Marriage, Family and Child Psychology from Azusa Pacific College in Azusa, California and a B.A. in Christian Education from St. Andrews Presbyterian College in Laurinburg, North Carolina. Jeffrey A. Anderson has been Vice President, Regulatory Affairs and Quality Assurance since September 1997 when he joined the Company. Prior to such time and since November 1995, Mr. Anderson had served as Regulatory Affairs Manager of Medtronic. From December 1993 to November 1995, Mr. Anderson served as Regulatory Affairs Specialist of Sybron Dental Specialties and from December 1991 to December 1993, he served as Regulatory Affairs/Quality Assurance Manager of Laser Medical Technology, Inc. Mr. Anderson received a B.S. in Physics from California State University Fullerton. Patrick J. Day has served as a director of the Company since August 1991. Mr. Day is a Certified Public Accountant and owns a CPA firm which he established in 1967. He has served as a director for several organizations including the First Presbyterian Church of Hollywood and many private companies. Mr. Day is the father of Dr. Cozean, the Company's Chairman of the Board, Chief Executive Officer and President. Mr. Day has a B.A. in Accounting from the University of Idaho. Grace Ching-Hsin Lin has served as a director of the Company since February 1992, representing a group of original investors in the Company. Ms. Lin has been an agent providing real estate consulting 66 services for Security Trust Realty since April 1988 and an owner of South Pacific Investment, an investment management company, since 1989. G. Lynn Powell, D.D.S. Dr. Powell joined the Board of Directors in January 1997. Dr. Powell has been on the faculty at the University of Utah since 1982, where he currently serves as the Assistant Dean for Dental Education in the School of Medicine and Professor in the Department of Pathology. He is a patent holder who has performed extensive research in the field of dentistry serving as primary investigator on several funded grants and is author or co-author of over 45 papers in journals, a majority of which relate to the use of lasers in dentistry. He serves as a reviewer for three dental and laser journals, has lectured nationally as well as internationally and routinely presents his work at research meetings. Dr. Powell is the current President of the International Society for Lasers in Dentistry. Dr. Powell received his D.D.S. from the University of Washington and was on the full time faculty in Restorative Dentistry at that institution for ten (10) years. E. Donald Shapiro joined the Board of Directors in August 1994. Since 1983, Mr. Shapiro has served as the Joseph Solomon Distinguished Professor of Law at New York Law School where he served as both Dean and Professor of Law from 1973 to 1983. He is Supernumerary Fellow of St. Cross College at Oxford University, England. Mr. Shapiro received a J.D. degree at Harvard Law School. He currently serves on the Boards of Directors for several public companies including Loral Space and Communications, Ltd., Eyecare Products PLC, Kranzco Realty Trust, Group Health Incorporated, Vasomedical Corporation, MacroChem Corporation, United Industrial, Telepad, Inc. and Food Entertainment, Inc. He also serves on the Board of Directors of Bank Leumi NY. Mr. Shapiro is special counsel to the law firm of Herzfeld and Rubin, which firm is representing the Company in the Fiber Litigation described above under "Business--Legal Proceedings." Mr. Shapiro is not a partner of such firm and receives no compensation calculated by reference to such firm's profits. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, and the regulations thereunder, require the Company's directors, executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company, and to furnish the Company with copies of all Section 16(a) forms they file. During the most recent fiscal year ended March 31, 1998, Jeffrey A. Anderson, J. Randy Alexander and Judith A. McCall, each an executive officer of the Company, failed to file on a timely basis an Initial Statement of Beneficial Ownership of Securities on Form 3. During the fiscal year ended March 31, 1998, Tom Hazen, also an executive officer of the Company, and Patrick J. Day, a director of the Company, failed to file on a timely basis a Statement of Changes of Beneficial Ownership on Form 4. During the fiscal year ended March 31, 1997, G. Lynn Powell, D.D.S., a director of the Company failed to file on a timely basis an Initial Statement of Beneficial Ownership of Securities on Form 3. All of the delinquent forms referred to above were subsequently filed except the Form 4 of Mr. Day, which is expected to be filed within seven days of the date of this report. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the two (2) fiscal years ended March 31, 1997 and 1998, all other Section 16(a) filing requirements applicable to the Company's officers, directors and greater than 10% beneficial owners were complied with. 67 Item 11. Executive Compensation. Summary Compensation Table The following table sets forth information concerning compensation paid to the Company's Chief Executive Officer and each other executive officer of the Company who received an annual salary and bonus of more than $100,000 for services rendered to the Company during the fiscal year ended March 31, 1998.
Long-term Compensation Awards Annual Compensation/(1)/ ------------------- Fiscal ------------------------ Securities All Other Name and Principal Position Year Salary Bonus Underlying Options Compensation --------------------------- ------ ----------- ---------- ------------------- ------------ Colette Cozean, Ph.D, President, 1998 $165,000 $100,000 1,000,000 $16,704/(2)/ Chief Executive Officer and 1997 $151,064 -- 217,500 $32,300/(3)/ Director of Research 1996 $112,000 -- 140,000 $19,800/(4)/ T. Daniel Caruso, Jr. 1998 $114,000 $ 14,500 -0- $ -- Senior Vice President, 1997 $105,625 $ 10,000 109,500 $ -- Sales and Marketing 1996 $ 90,625 $ 10,000 95,000 $ --
_____________________ (1) Excludes perquisites and other personal benefits, securities and properties otherwise categorized as salary or bonuses which in the aggregate, for each of the named persons did not exceed the lesser of either $50,000 or 10% of the total annual salary reported for such person. The Company has agreed to enter into Termination Agreements with the above executive officers which will provide, when executed, that in the event of a termination of employment following a change in control of the Company, as defined in such agreement, the named executive officer will receive (i) a lump sum cash payment equal to two times the highest annual level of total cash compensation paid to that officer during the three (3) calendar years prior to the termination; (ii) immediate vesting of all previously granted stock options; and (iii) continuing health benefits for a period of twenty-four (24) months. The Company has also entered into Employment Agreements with each of the named persons which provide for two to four (4) months of severance benefits upon their termination of employment. Based upon salary levels as of March 31, 1998, such severance benefits range from approximately $36,668 to $55,000 for each of the named persons. (2) Represents the full amount of premiums paid by the Company ($5,000) for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean and an auto allowance of $11,704. (3) Represents the full amount of premiums paid by the Company ($27,500) for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean and an auto allowance of $4,800. (4) Represents the full amount of premiums paid by the Company ($15,000) for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean and an auto allowance for Dr. Cozean ($4,800). 68 Options Granted in Last Fiscal Year The following table sets forth certain information concerning stock options granted to the named executive officers during the fiscal year ended March 31, 1998. This information includes hypothetical potential gains from stock options granted in fiscal 1998. These hypothetical gains are based entirely on assumed annual growth rates of 5% and 10% in the value of the Company's Common Stock price over the 10 year life of the stock options granted in 1998. These assumed rates of growth were selected by the Securities and Exchange Commission for illustration purposes only, and are not intended to predict future stock prices, which will depend upon market conditions and the Company's future performance and prospects.
Potential Realizable Value Number of Percent of at Assumed Annual Rates Shares of Total Options of Stock Price Appreciation Common Stock Granted to Exercise or for Option Term Underlying Employees During Base Price Expiration ---------------------------- Name Options Granted Fiscal Year Per Share/(1)/ Date 5%($) 10%($) - ------------------------ --------------- ----------------- -------------- ---------- ------------ -------------- Colette Cozean, Ph.D. 1,000,000/(2)/ 57% $7.979 2,008 $618,213 $1,027,613 T. Daniel Caruso, Jr. 0 0% -- -- $ -- $ --
____________________ (1) The options were granted at an exercise price at least equal to the fair market value of the Class A Common Stock on the date of grant. The exercise price may be paid by delivery of cash or already owned shares, subject to certain conditions. (2) Such options vest in five equal annual installments commencing March 31, 1998. Aggregated Option Exercises and Fiscal Year End Option Values The following table sets forth certain information regarding stock options exercised by the named executive officers during the fiscal year ended March 31, 1998, as well as the number of exercisable and unexercisable in-the-money stock options and their values at fiscal year-end. An option is in-the-money if the fair market value for the underlying securities exceeds the exercise price of the option.
Number of Value of Unexercised Unexercised Options In-the-Money Options Shares at March 31, 1998 at March 31, 1998/(1)/ Acquired Value ------------------------- ------------------------- on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable ----------- -------- ------------------------- ------------------------- Colette Cozean, Ph.D. 0 $0 341,730 1,374,420 $0 $0 T. Daniel Caruso, Jr. 0 $0 37,530 179,500 $0 $0
____________________ (1) Represents the Nasdaq closing price of underlying securities at fiscal year end, minus the exercise price of the options. Director Compensation All directors are elected annually and hold office until the next Annual Meeting of Shareholders and until their successors are duly elected and qualified. The Company pays to all nonemployee directors $1,000 per Board meeting attended, $1,000 per committee meeting attended which is not in conjunction with a Board meeting, $500 per committee meeting attended in conjunction with a Board meeting, and $500 per telephonic Board or committee meeting. Directors are also reimbursed for their out-of-pocket expenses incurred in attending meetings of the Board of Directors and its committees. Mr. Shapiro also receives a fee of $3,000 per month as compensation for additional consulting services relating to the Company's pending litigation matter and to new business issues. During the fiscal year ended March 31, 1998, Dr. Powell received a cash bonus of $15,000 for his efforts in obtaining FDA clearance for hard tissue applications. 69 The Company may also periodically award options or warrants to its directors, under its existing stock option plans and otherwise. The Company's outstanding Stock Option Plans include: (i) the 1995 Stock Option Plan which provides for the granting of "incentive stock options," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options"), and nonstatutory options; (ii) the 1996 Stock Option Plan which also provides for the granting of Incentive Stock Options and nonstatutory stock options; (iii) the February 1996 Stock Option Plan which provides for the granting of nonstatutory stock options; (iv) the 1997 Stock Option Plan, which provides for the granting of nonstatutory stock options; and (v) the 1998 Stock Option Plan, described below. The Company's 1998 Stock Option Plan (the "1998 Plan") authorizes the Company to grant options to purchase shares of the Company's Class A Common Stock, no par value, to selected officers, directors (including non-employee directors), key employees and other providers of service to the Company, with the aggregate number of shares to be delivered upon exercise not to exceed 1,500,000. The 1998 Plan terminates in January 2008. Options granted under the 1998 plan will have a term not to exceed ten (10) years and an exercise price in an amount determined by the committee administering the Plan. The plan is subject to shareholder approval. In fiscal 1998, the Company issued options to purchase the following numbers of shares to its directors: (i) Colette Cozean - 1,000,000 shares vesting over 5 years; (ii) Patrick J. Day, Grace Ching - Hsin Lin, G. Lynn Powell, and E. Donald Shapiro - 40,000 shares each vesting over 4 years. All of such options have an exercise price of $7.98, per share, the fair market value of the Company's Common Stock on the date of grant. In addition to the above, Mr. Shapiro and Dr. Powell were each granted options to purchase 30,000 shares at $10.31 per share vesting over 3 years in connection with services rendered by them to the Company. All of the above options have a term of ten years. The Company's Articles of Incorporation and indemnification agreements entered into between the Company and certain of the Company's directors and officers require the Company to indemnify such officers and directors to the fullest extent permitted by applicable law against liabilities incurred in connection with their duties as officers and directors of the Company. Such indemnification rights may extend to liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. Compensation Committee Interlocks and Insider Participation During the fiscal year ended March 31, 1998, the members of the Compensation Committee were Grace Ching-Hsin Lin, G. Lynn Powell, D.D.S. and E. Donald Shapiro, all of whom are non-employee directors of the Company. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers and directors of another entity. Board Compensation Committee Report on Executive Compensation The Compensation Committee of the Board of Directors hereby submits its report concerning the compensation of the Company's executive officers, including the Chief Executive Officer. The Compensation Committee is responsible for setting and administering the compensation policies of the Company with respect to its executive officers. The Company's executive compensation program is designed to align executive compensation with the Company's business strategy and performance. The goals of the executive compensation program are: (i) to attract and retain key executives critical to the success of the Company; (ii) to provide levels of compensation which are competitive with other entities in the industry of similar size; and (iii) to motivate executives to enhance long-term shareholder value by building appropriate ownership in the Company. 70 The annual compensation has been considered for the executive officers, including Dr. Colette Cozean, the Company's President and Chief Executive Officer, including base salaries, coupled with stock options and other incentives. Base salaries are the fixed component of the executive officers' compensation package. Salaries are set and adjusted based upon competitive standards and individual performance. This year the Company also engaged Ernst & Young, LLP to perform a survey of compensation packages for Chief Executive Officers of comparable companies. The award of any bonuses is based upon the performance of the Company during the prior year as set forth in the Company's audited financial statements, and the contribution of each individual executive officer to the Company's performance. Among the factors (the "Performance Factors") which the Committee has established to assess the Company's overall performance are: the Company's performance against budget and targets for sales, expenses and revenue, and the successful implementation of both short and long-term corporate strategies for enhancing shareholder value (e.g. strategic acquisitions, divestitures, facilities expansion, productivity, improvements, etc.) and product development along with technical advances as well as new patents. A substantial portion of the compensation of executive officers is based upon the award of stock options which rely on increases in the value of the Company's Common Stock. The issuance of options is intended to encourage such employees to establish a meaningful, long-term ownership interest in the Company consistent with the interests of the Company's shareholders. Under the Company's stock option plans, options are granted from time to time to certain officers, directors and key employees of the Company and its subsidiaries at the fair market value of the Company's Common Stock at the time of grant. Because the compensation element of options is dependent on increases over time in the market value of such shares, stock options represent compensation that is tied to the Company's long-term performance. The Committee has reviewed the fiscal 1998 base salaries of each of the executive officers and is of the opinion that such salaries are not at all unreasonable in view of those paid by the Company's competitors of a similar size. The Committee also reviewed the stock options awarded in fiscal 1998 and is of the opinion that the option awards are reasonable in view of the officers' individual performance and positions with the Company. In February 1998 the Committee reviewed Dr. Cozean's base salary for 1998, and concluded that her salary is not unreasonable in view of those paid to Chief Executive Officers of the Company's competitors of similar size. Dr. Cozean was paid a cash bonus of $100,000 for 1998, in view of her contribution towards the Company's receipt of FDA clearance for the use of a laser in hard tissue procedures and other milestones achieved by the Company which were reported to the Committee. Dr. Cozean also received options for the purchase of 1,000,000 shares of the Company's common stock all at prices equaling the Company's then current trading price, subject to a five (5) year vesting schedule, for her past and anticipated future services to the Company, which the Committee believes to be reasonable and appropriate in light of her individual performance. COMPENSATION COMMITTEE: E. Donald Shapiro Grace Ching-Hsin Lin G. Lynn Powell, D.D.S. 71 Performance Graph Set forth below is a line graph comparing the cumulative total shareholder return on the Company's Class A Common Stock, based on its market price, with the cumulative total return of companies on the Nasdaq Stock Market (U.S. common stocks) and the Surgical and Medical Instruments Index, assuming reinvestment of dividends, for the period beginning December 1, 1994 through the Company's fiscal year ended March 31, 1998. The Company's Class A Common Stock was initially offered to the public on November 30, 1994. This graph assumes that the value of the investment in the Company's Class A Common Stock and each of the comparison groups was $100 on December 1, 1994. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 11/30/94 3/31/95 3/29/96 3/31/97 3/31/98 --------- -------- -------- -------- -------- Premier Laser Systems, Inc......... $100.00 $ 80.00 $172.50 $110.00 $210.00 Surgical and Medical Instruments... $100.00 $119.05 $186.74 $190.53 $262.85 Nasdaq Market Index................ $100.00 $103.04 $138.60 $155.06 $234.33
In the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997, the Company compared the cumulative total shareholder return on its Common Stock to the Hambrecht & Quist Technology Index, instead of the Surgical and Medical Instruments Index, as used this year. The Hambrecht & Quist Technology Index was unavailable to the Company for purposes of this report. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of March 31, 1998, regarding the beneficial ownership of the Company's Common Stock by: (i) all persons known by the Company to beneficially own more than 5% of the Company's Common Stock, (ii) each director and executive officer of the Company, and (iii) all directors and executive officers as a group. The following table treats the Common Stock, the Class E-1 Common Stock and the Class E-2 Common Stock as a single class. 72
Amount and Nature of Percent of Name and Address of Beneficial Owner/(1)/ Beneficial Ownership Common Stock - -------------------------------------------- -------------------- ------------- Colette Cozean, Ph.D./(2)/.................. 625,685 4.2% Patrick J. Day/(3)/......................... 257,981 1.7% E. Donald Shapiro/(4)/...................... 50,000 * Grace Ching-Hsin Lin/(5)/................... 72,801 * T. Daniel Caruso, Jr./(6)/.................. 169,552 1.1% Michael L. Hiebert/(7)/..................... 36,000 * G. Lynn Powell, D.D.S./(8)/................. 41,501 * Tom Hazen................................... 0 0% J. Randy Alexander.......................... 0 0% Jeffrey A. Anderson......................... 0 0% Judith A. McCall/(9)/....................... 30,532 * All directors and executive officers as a group (11 persons)/(10)/................... 1,283,982 8.6%
____________________ * Less than 1%. (1) The address of each of Dr. Cozean, Ms. Lin, Ms. McCall, and Messrs. Day, Caruso, Hiebert, Powell, Hazen, Alexander, Anderson and Shapiro is 3 Morgan, Irvine, California 92618. Unless otherwise noted, the Company believes that all persons named in the table have sole investment and voting power with respect to all shares of Class A Common Stock beneficially owned by such person, such shares, subject to community property laws where applicable. (2) Includes 49,144 shares of Class A Common Stock, 43,514 shares of Class E-1 Common Stock and 43,514 shares of Class E-2 Common Stock held by Dr. Cozean and 1,594 shares of Class A Common Stock, 1,412 shares of Class E-1 Common Stock and 1,412 shares of Class E-2 Common Stock held by Dr. Cozean as custodian for her two minor children. Also includes 485,095 shares of Class A Common Stock subject to options exercisable within sixty (60) days. (3) Includes 49,263 shares of Class A Common Stock, 48,047 shares of Class E-1 Common Stock and 48,047 shares of Class E-2 Common Stock. Also includes 78,992 shares of Class A Common Stock, 16,816 shares of Class E-1 Common Stock and 16,816 shares of Class E-2 Common Stock subject to warrants and options exercisable within sixty (60) days. (4) Includes 50,000 shares of Class A Common Stock subject to warrants and options exercisable within sixty (60) days. (5) Includes 6,330 shares of Class A Common Stock, 5,605 shares of Class E-1 Common Stock and 5,605 shares of Class E-2 Common Stock held by Linco Investments, a limited partnership in which Ms. Lin's husband serves as a general partner, and 1,899 shares of Class A Common Stock, 1,681 shares of Class E-1 Common Stock and 1,681 shares of Class E-2 Common Stock held by the pension plan for Ms. Lin's husband. Also includes 50,000 shares of Class A Common Stock subject to warrants exercisable within sixty (60) days. (6) Includes 13,722 shares of Common Stock, 12,150 shares of Class E-1 Common Stock and 12,150 shares of Class E-2 Common Stock. Also includes 123,522 shares of Class A Common Stock, 4,004 shares of Class E-1 Common Stock and 4,004 shares of Class E-2 Common Stock subject to options exercisable within sixty (60) days. (7) Includes 36,000 shares of Class A Common Stock subject to warrants and options exercisable within sixty (60) days. (8) Consists of 41,501 shares of Class A Common Stock subject to warrants and options exercisable within sixty (60) days. (9) Consists of 30,532 shares of Class A Common Stock subject to options exercisable within sixty (60) days. (10) Includes 121,952 shares of Class A Common Stock, 112,409 shares of Class E- 1 Common Stock and 112,409 shares of Class E-2 Common Stock. Also includes 895,572 shares of Class A Common Stock, 4,004 shares of Class E-1 Common Stock and 4,004 shares of Class E-2 Common Stock subject to warrants and options exercisable within sixty (60) days. 73 Item 13. Certain Relationships and Related Transactions. On February 21, 1998, the Board of Directors of the Company extended the terms of two warrants which it had previously granted to Patrick Day, a director of the Company, as follows. Prior to the Company's initial public offering in 1994, the Company issued to Mr. Day a warrant to purchase 9,044 shares of Class A Common Stock, 8,008 shares of Class E-1 Common Stock and 8,008 shares of Class E-2 Common Stock at an aggregate exercise price of $100,000. Such warrant initially provided for an expiration date of August 7, 1996. The Board extended the expiration of this warrant on May 20, 1996 until March 31, 1997, again on February 21, 1997 until March 31, 1998, and again in February 1998 until August 7, 2000. The Company has also previously granted to Mr. Day another warrant to purchase 9,948 shares of Class A Common Stock, 8,808 shares of Class E-1 Common Stock and 8,808 shares of Class E-2 Common Stock at an aggregate exercise price of $9,948. This warrant initially provided for an expiration date of April 26, 1998. In February 1998, the Board extended the term of such warrant for an additional two years expiring on April 26, 2000. Neither the Company nor any of its directors, nominees, executive officers or beneficial owners of more than five percent of the outstanding Common Stock, or any immediate family member of the foregoing, are, or during fiscal 1998 at any time, were, or are proposed to be, parties to, or have a direct or indirect material interest in, any relationships or transactions, or series of related transactions, described in Item 404 of Regulation S-K promulgated by the Securities and Exchange Commission. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Page in Annual Report on Form 10-K/A -------------- (a) The following documents are filed as part of this Annual Report on Form 10-K/A. (1) Report of Haskell & White LLP, Independent Auditors...................43 Report of Price Waterhouse LLP, Independent Accountants...............44 Consolidated Balance Sheets at March 31, 1998 and 1997 (restated).....45 Consolidated Statements of Operations for the Years Ended March 31, 1998, 1997 (restated) and 1996....................................46 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1998, 1997 (restated) and 1996........................47 Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1997 (restated) and 1996....................................48 Notes to Consolidated Financial Statements............................49 (2) Financial Statements Schedules Schedule II-Valuation and Qualifying Accounts for the Years Ended March 1998, 1997 and 1996.............................................63 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K).....74
Exhibits - -------- 2.1 Agreement and Plan of Merger dated as of April 24, 1997 among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4, Registration No. 33- 29573). 2.2 First Amendment to Agreement and Plan of Merger dated as of August 6, 1997, among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition of Delaware, 74 Exhibit - ------- Inc. (incorporated herein by this reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed October 15, 1997). 2.3 Second Amendment to Agreement and Plan of Merger dated as of September 16, 1997 among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-K filed October 15, 1997). 2.4 Stock Purchase Agreement dated February 25, 1998 between Premier Laser Systems, Inc., and Ophthalmic Imaging Systems (incorporated herein by this reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.5 Purchase Agreement dated February 25, 1998 between Registrant and Mark S Blumenkranz, M.D. and Recia Blumenkranz, M.D. (incorporated herein by this reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.6 Purchase Agreement dated February 25, 1998 between Registrant and Stanley Chang, M.D. (incorporated herein by this reference to Exhibit 99.8 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.7 Purchase Agreement dated February 25, 1998 between Registrant and J.B. Oxford & Company (incorporated herein by this reference to Exhibit 99.12 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 3.1 Amended and Restated Articles of Incorporation filed with the California Secretary of State on November 23, 1994. (incorporated herein by this reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10- QSB for the Quarter ended December 31, 1994). 3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33- 83984). 4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser Systems, Inc. and American Stock Transfer and Trust Company acting as rights agent (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed April 2, 1998). 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.2 Assignment Agreement dated July 27, 1992 between the Company and Michael Colvard, M.D. (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical Engineering, Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 75 Exhibit - ------- 10.4 Form of International Distribution Agreement (incorporated herein by this reference to Exhibit 10.12 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.5 Letter of Intent between the Company and Richard Leaderman, D.D.S., together with related Patent Assignments as filed in the U.S. Patent and Trademark Office on February 22, 1994 (incorporated herein by this reference to Exhibit 10.13 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). +10.6 Exclusive Marketing Agreement dated July 26, 1994 between the Company, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd. (incorporated herein by this reference to Exhibit 10.14 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.7 Form of Indemnification Agreement (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.8 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as amended (incorporated herein by this reference to Exhibit 10.26 to the Registrant's Registration Statement on Form SB-2, Registration No. 33- 83984). 10.9 Form of Warrant Agreement (including form of Class B Warrant Certificates) (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.10 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.11 1992 Stock Option Plan, together with form of Nonstatutory Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 4.5 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.12 Employee Bonus Stock Plan, together with form of Bonus Stock Agreement (incorporated herein by this reference to Exhibit 4.6 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.13 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited (incorporated herein by this reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2, Registration Number 33- 83984). 10.14 Letter Agreement dated October 13, 1987 between Pfizer Laser Systems, Inc. and Duke University, together with patent assignment as filed in the U.S. Patent and Trademark Office on October 23, 1993 (incorporated herein by this reference to Exhibit 10.8 to the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984). 10.15 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company (incorporated herein by this reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 76 Exhibit - ------- 10.16 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10- KSB for the fiscal year ended March 31, 1996). 10.17 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S. (incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.18 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.19 Form of Consulting Agreement (incorporated herein by this reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.20 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive Officers (incorporated herein by this reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.21 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996). 10.22 February 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.23 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.24 Loan Agreement dated September 24, 1997 between EyeSys Technologies, Inc. and Silicon Valley Bank together with Schedule to Loan Agreement dated September 30, 1997.* 10.25 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.38 to the Registrant's Registration Statement on Form SB-2 Registration No. 333- 04219). 10.26 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.27 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.28 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.29 Operating Agreement of Data.Site dated January 31, 1997 (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 77 Exhibit - ------- 10.30 Agreement and Plan of Merger dated April 24, 1997 between the Registrant, Premier Acquisition of Delaware, Inc. and Eyesys Technologies, Inc. (incorporated herein by this reference to Exhibit 10.41 of the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.31 Loan Agreement dated September 24, 1997 between Silicon Valley Bank and EyeSys Technologies, Inc. (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed November 14, 1997, as amended by Amendment filed November 26, 1997). 10.32 Third Party Security Agreement dated September 24, 1997, between Silicon Valley Bank and Premier Laser Systems, Inc. (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed November 14, 1997, as amended by Amendment filed November 26, 1997). 10.33 1997 Stock Option Plan, together with form of Nonqualified Stock Option Agreement.* 10.34 1998 Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.* 16 Letter dated June 11, 1998, from Ernest & Young, LLP (incorporated herein by this reference to Exhibit 16 to the Registrant's Current Report on Form 8-K filed June 1, 1998, as amended June 15, 1998). 21 Subsidiaries. 27 Financial Data Schedule.* 99.1 Form of Class C Warrant (OIS transaction) (incorporated herein by this reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.2 Form of Class D Warrant (OIS transaction) (incorporated herein by this reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.3 Class C Warrant dated February 25, 1998 issued by Registrant to Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.4 Class D Warrant dated February 25, 1998 issued by Premier to Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.6 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.5 Registration Rights Agreement dated February 25, 1998 issued by Premier and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.7 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.6 Class C Warrant dated February 25, 1998 issued by Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.9 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 78 Exhibit - ------- 99.7 Class D Warrant dated February 25, 1998 issued by Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.10 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.8 Registration Rights Agreement dated February 25, 1998 issued by Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.11 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.9 Class C Warrant dated February 25, 1998 issued by Registrant to J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.13 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.10 Class D Warrant dated February 25, 1998 issued by Registrant to J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.14 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.11 Series C Warrant Certificate dated November 21, 1995 issued by Ophthalmic to J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.15 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.12 Consent to Transfer of Warrant dated February 25, 1998 issued by Ophthalmic and Premier (OIS transaction) (incorporated herein by this reference to Exhibit 99.16 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.13 Warrant Agreement dated November 31, 1995 between Ophthalmic and J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.17 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.14 Registration Rights Agreement dated February 25, 1998 between Premier and J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.18 to the Registrant's Current Report on Form 8-K filed March 9, 1998). +99.15 Agreement dated July 23, 1997 between Nidek Co., Ltd. and Eyesys Technologies, Inc. (incorporated herein by this reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-4 Registration No. 333-29573). +99.16 Exclusive Distribution Agreement dated June 2, 1997 between Eyesys Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein by this reference to Exhibit 99.3 to the Registrant's Registration Statement on Form S-4 Registration No. 333-29573). _____________________ * Filed herewith. ** Confidential treatment has been requested with respect to certain portions of this Exhibit. + Confidential treatment has been granted with respect to portions of this Exhibit. (b) Reports on Form 8-K. During the fourth quarter of the period covered by this report, the Company filed one Current Report on Form 8-K (filed March 9, 1998). Such filing reported the Company's acquisition of common stock and warrants of Ophthalmic Imaging Systems ("OIS"). 79 Such Report included: Audited Balance Sheets of OIS as of August 31, 1997 and 1996, Audited Statements of Operations for the years ended August 31, 1997, 1996 and 1995, Audited Statements of Stockholders' Equity for the years ended August 31, 1997, 1996 and 1995, and Statements of Cash Flows for the year ended August 31, 1996, 1996 and 1995. In addition, such report included Unaudited Financial Statements of OIS consisting of a Condensed Balance Sheet as of November 30, 1997, Condensed Statement of Operations for the three months ended November 30, 1997 and 1996, and Condensed Statements of Cash Flows for the three months ended November 30, 1997 and 1996. Such financial statements also included Pro Forma Combined Financial Statements for the combined companies required to be filed pursuant to Form 8-K. 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIER LASER SYSTEMS, INC. By:/s/ COLETTE COZEAN ----------------------------------------- Colette Cozean, Ph.D., Chief Executive Officer and President 81 EXHIBIT INDEX ------------- Exhibit - ------- 2.1 Agreement and Plan of Merger dated as of April 24, 1997 among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4, Registration No. 33-29573). 2.2 First Amendment to Agreement and Plan of Merger dated as of August 6, 1997, among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.2 to the Registrant's Current Report on Form 8- K filed October 15, 1997). 2.3 Second Amendment to Agreement and Plan of Merger dated as of September 16, 1997 among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.3 to the Registrant's Current Report on Form 8- K filed October 15, 1997). 2.4 Stock Purchase Agreement dated February 25, 1998 between Premier Laser Systems, Inc., and Ophthalmic Imaging Systems (incorporated herein by this reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.5 Purchase Agreement dated February 25, 1998 between Registrant and Mark S Blumenkranz, M.D. and Recia Blumenkranz, M.D. (incorporated herein by this reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.6 Purchase Agreement dated February 25, 1998 between Registrant and Stanley Chang, M.D. (incorporated herein by this reference to Exhibit 99.8 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.7 Purchase Agreement dated February 25, 1998 between Registrant and J.B. Oxford & Company (incorporated herein by this reference to Exhibit 99.12 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 3.1 Amended and Restated Articles of Incorporation filed with the California Secretary of State on November 23, 1994. (incorporated herein by this reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10-QSB for the Quarter ended December 31, 1994). 3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33- 83984). 4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser Systems, Inc. and American Stock Transfer and Trust Company acting as rights agent (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed April 2, 1998). 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 82 Exhibit - ------- 10.2 Assignment Agreement dated July 27, 1992 between the Company and Michael Colvard, M.D. (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical Engineering, Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.4 Form of International Distribution Agreement (incorporated herein by this reference to Exhibit 10.12 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.5 Letter of Intent between the Company and Richard Leaderman, D.D.S., together with related Patent Assignments as filed in the U.S. Patent and Trademark Office on February 22, 1994 (incorporated herein by this reference to Exhibit 10.13 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). +10.6 Exclusive Marketing Agreement dated July 26, 1994 between the Company, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd. (incorporated herein by this reference to Exhibit 10.14 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.7 Form of Indemnification Agreement (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.8 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as amended (incorporated herein by this reference to Exhibit 10.26 to the Registrant's Registration Statement on Form SB-2, Registration No. 33- 83984). 10.9 Form of Warrant Agreement (including forms of Class B Warrant Certificates) (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.10 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.11 1992 Stock Option Plan, together with form of Nonstatutory Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 4.5 to the Registrant's Registration Statement on Form SB-2, Registration No. 33- 83984). 10.12 Employee Bonus Stock Plan, together with form of Bonus Stock Agreement (incorporated herein by this reference to Exhibit 4.6 to the Registrant's Registration Statement on Form SB-2, Registration No. 33- 83984). 10.13 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited (incorporated herein by this reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984). 10.14 Letter agreement dated October 13, 1987 between Pfizer Laser Systems, Inc. and Duke University, together with patent assignment as filed in the U.S. Patent and Trademark Office on October 23, 1993 (incorporated herein by this reference to Exhibit 10.8 to the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984). 83 Exhibit - ------- 10.15 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company (incorporated herein by this reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.16 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.17 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S. (incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.18 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.19 Form of Consulting Agreement (incorporated herein by this reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.20 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive Officers (incorporated herein by this reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.21 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996). 10.22 February 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.23 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.24 Loan Agreement dated September 24, 1997 between EyeSys Technologies, Inc. and Silicon Valley Bank together with Schedule to Loan Agreement dated September 30, 1997.* 10.25 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.38 to the Registrant's Registration Statement on Form SB-2 Registration No. 333- 04219). 10.26 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.27 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.28 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 84 Exhibit - ------- 10.29 Operating Agreement of Data.Site dated January 31, 1997 (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.30 Agreement and Plan of Merger dated April 24, 1997 between the Registrant, Premier Acquisition of Delaware, Inc. and EyeSys Technologies, Inc. (incorporated herein by this reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.31 Loan Agreement dated September 24, 1997 between Silicon Valley Bank and EyeSys Technologies, Inc. (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed November 14, 1997, as amended by Amendment filed November 26, 1997). 10.32 Third Party Security Agreement dated September 24, 1997, between Silicon Valley Bank and Premier Laser Systems, Inc. (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed November 14, 1997, as amended by Amendment filed November 26, 1997). 10.33 1997 Stock Option Plan, together with form of Nonqualified Stock Option Agreement.* 10.34 1998 Stock Option Plan.* 16 Letter dated June 11, 1998 from Ernst & Young, LLP (incorporated herein by this reference to Exhibit 16 to the Registrant's Current Report on Form 8-K filed June 1, 1998, and as amended June 15, 1998). 21 Subsidiaries. 23.1 Consent of Haskell & White LLP.* 27 Financial Data Schedule.* 99.1 Form of Class C Warrant (OIS transaction) (incorporated herein by this reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.2 Form of Class D Warrant (OIS transaction) (incorporated herein by this reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.3 Class C Warrant dated February 25, 1998 issued by Registrant to Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.4 Class D Warrant dated February 25, 1998 issued by Premier to Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.6 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.5 Registration Rights Agreement dated February 25, 1998 issued by Premier and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.7 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 85 Exhibit - ------- 99.6 Class C Warrant dated February 25, 1998 issued by Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.9 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.7 Class D Warrant dated February 25, 1998 issued by Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.10 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.8 Registration Rights Agreement dated February 25, 1998 issued by Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.11 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.9 Class C Warrant dated February 25, 1998 issued by Registrant to J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.13 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.10 Class D Warrant dated February 25, 1998 issued by Registrant to J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.14 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.11 Series C Warrant Certificate dated November 21, 1995 issued by Ophthalmic to J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.15 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.12 Consent to Transfer of Warrant dated February 25, 1998 issued by Ophthalmic and Premier (OIS transaction) (incorporated herein by this reference to Exhibit 99.16 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.13 Warrant Agreement dated November 31, 1995 between Ophthalmic and J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.17 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.14 Registration Rights Agreement dated February 25, 1998 between Premier and J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.18 to the Registrant's Current Report on Form 8-K filed March 9, 1998). +99.15 Agreement dated July 23, 1997 between Nidek Co., Ltd. and Eyesys Technologies, Inc. (incorporated herein by this reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-4 Registration No. 333-29573). +99.16 Exclusive Distribution Agreement dated June 2, 1997 between Eyesys Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein by this reference to Exhibit 99.3 to the Registrant's Registration Statement on Form S-4 Registration No. 333-29573). ________________________ * Filed herewith. ** Confidential treatment has been requested with respect to certain portions of this Exhibit. + Confidential treatment has been granted with respect to portions of this Exhibit. 86 EX-10.24 2 LOAN AGREEMENT WITH SILICON VALLEY BANK - 9/24/97 EXHIBIT 10.24 TABLE OF CONTENTS Page ---- 1 ACCOUNTING AND OTHER TERMS.............................................. 4 -------------------------- 2 LOAN AND TERMS OF PAYMENT............................................... 4 ------------------------- 2.1 Advances...................................................... 4 2.2 Interest Rate, Payments....................................... 4 2.3 Fees.......................................................... 5 3 CONDITIONS OF LOANS..................................................... 5 ------------------- 3.1 Conditions Precedent to Initial Advance....................... 5 3.2 Conditions Precedent to all Advances.......................... 5 4 REPRESENTATIONS AND WARRANTIES.......................................... 5 ------------------------------ 4.1 Due Organization and Authorization............................ 5 4.2 Litigation.................................................... 5 4.3 No Material Adverse Change in Financial Statements............ 5 4.4 Solvency...................................................... 6 4.5 Regulatory Compliance......................................... 6 4.6 Subsidiaries.................................................. 6 4.7 Full Disclosure............................................... 6 5 AFFIRMATIVE COVENANTS................................................... 6 --------------------- 5.1 Government Compliance......................................... 6 5.2 Taxes......................................................... 6 5.3 Insurance..................................................... 7 5.4 Primary Accounts.............................................. 7 6 NEGATIVE COVENANTS...................................................... 7 ------------------ 6.1 Changes in Business, Ownership, Management or Business Locations..................................................... 7 6.2 Mergers or Acquisitions....................................... 7 6.3 Compliance.................................................... 7 7 EVENTS OF DEFAULT....................................................... 7 ----------------- 7.1 Payment Default............................................... 7 7.2 Covenant Default.............................................. 7 7.3 Material Adverse Change....................................... 8 7.4 Insolvency.................................................... 8 7.5 Third Party Security Agreement................................ 8 7.6 Judgments..................................................... 8 7.7 Misrepresentations............................................ 8 8 BANK'S RIGHTS AND REMEDIES.............................................. 8 -------------------------- 8.1 Rights and Remedies........................................... 8 8.2 Remedies Cumulative........................................... 8 8.3 Demand Waiver................................................. 8 9 NOTICES................................................................. 9 ------- 10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER.............................. 9 ------------------------------------------ 2 11 GENERAL PROVISIONS............................. 9 ------------------ 11.1 Successors and Assigns.................. 9 11.2 Indemnification......................... 9 11.3 Time of Essence......................... 9 11.4 Severability of Provision............... 9 11.5 Amendments in Writing, Integration...... 9 11.6 Counterparts............................ 10 11.7 Survival................................ 10 11.8 Confidentiality......................... 10 12 DEFINITIONS.................................... 10 ----------- 12.1 Definitions............................. 10 3 This LOAN AGREEMENT is dated September 24, 1997, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, CA 95054 with a loan production office located at 18872 MacArthur Blvd, Ste. 100, Irvine, California 92612 and EYESYS TECHNOLOGIES, INC. ("Borrower"), whose address is 2776 Bingle Road, Houston, Texas 77055 provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as follows: 1. ACCOUNTING AND OTHER TERMS -------------------------- Accounting terms not defined in this Agreement will be construed following GAAP Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. This Agreement shall be construed to impart upon Bank a duty to act reasonably at all times. 2 LOAN AND TERMS OF PAYMENT ------------------------- 2.1 ADVANCES. Borrower will pay Bank the unpaid principal amount of all Advances and interest on the unpaid principal amount of the Advances. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Advances not exceeding the Committed Revolving Line. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. (b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form attached as Exhibit A. Bank will credit Advances to Borrower's deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Advances and other amounts due under this Agreement are immediately payable. 2.2 INTEREST RATE, PAYMENTS. (a) Interest Rate. Advances accrue interest on the outstanding principal balance at a per annum rate equal to the Prime Rate. After an Event of Default Obligations accrue interest at 5 percent above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the 24th of each month. Bank may debit any of Borrower's deposit accounts including Account Number 360062970 for principal and interest payments or any amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's Accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 4 2.3 FEES. Borrower will pay: (a) Facility Fee. A fully earned, non-refundable Facility Fee of $5,250 due on the Closing Date: and (b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and expenses) incurred through and after the date of this Agreement, are payable when due. 3 CONDITIONS OF LOANS ------------------- 3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. Bank's obligation to make the initial Advance is subject to the condition precedent that it receive the agreements, documents and fees it requires. 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. Bank's obligations to make each Advance, including the initial Advance, is subject to the following: (a) timely receipt of any Payment/Advance Form; and (b) the representations and warranties in Section 4 must be materially true on the date of the Payment/Advance Form and on the effective date of each Advance and no Event of Default may have occurred and be continuing, or result from the Advance. Each Advance is Borrower's representation and warranty on that date that the representations and warranties of Section 4 remain true. 4 REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower represents and warrants as follows: 4.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could cause a Material Adverse Change. 4.2 LITIGATION. Except as shown in the Schedule, there are no actions or proceedings pending or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary in which an adverse decision could cause a Material Adverse Change. 4.3 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated 5 results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 4.4 SOLVENCY. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 4.5 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has complied with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to all government authorities that are necessary to continue its business as currently conducted. 4.6 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities. 4.7 FULL DISCLOSURE. No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements misleading. 5. AFFIRMATIVE COVENANTS --------------------- Borrower will do all of the following: 5.1 GOVERNMENT COMPLIANCE. Borrower will maintain its and all Subsidiaries' legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify could have a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change. 5.2 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6 5.3 INSURANCE. Borrower will keep its business insured for risks and in amounts, as Bank requests. 5.4 PRIMARY ACCOUNTS. Borrower will maintain its primary depository and operating accounts with Bank. 6. NEGATIVE COVENANTS ------------------ Borrower will not do any of the following: 6.1 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or have a material change in its ownership of greater than 25%. Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations. 6.2 MERGERS OR ACQUISITIONS. (i) Merge or consolidate, or permit any of its Subsidiaries to merger or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person (except that Borrower may merge or consolidate or be acquired by Premier Laser Systems, Inc.) (ii) merge or consolidate a Subsidiary into another Subsidiary or into Borrower. 6.3 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Advance for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 7. EVENTS OF DEFAULT ----------------- Any one of the following is an Event of Default: 7.1 PAYMENT DEFAULT. If Borrower fails to pay any of the Obligations: 7.2 COVENANT DEFAULT. If Borrower violates any covenant in Section 6 or does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Advances will be made during the cure period): 7 7.3 MATERIAL ADVANCE CHANGE. If the Bank determines, based upon information available to it and in the exercise of its reasonable judgment, that there is a reasonable likelihood that Borrower will fail to comply with one or more of the covenants set forth in Section 5 during the next succeeding financial reporting period. 7.4 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 30 days (but no Advances will be made before any Insolvency Proceeding is dismissed): 7.5 THIRD PARTY SECURITY AGREEMENT. If there occurs an Event of Default under the Third Party Security Agreement; 7.6 JUDGMENTS. If a money judgment(s) in the aggregate of at least $50,000 is rendered against Borrower and is unsatisfied and unstayed for 10 days (but no Advances will be made before the judgment is stayed or satisfied); or 7.7 MISREPRESENTATIONS. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 8 BANK'S RIGHTS AND REMEDIES -------------------------- 8.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 7.4 occurs all Obligations are immediately due and payable without any action by Bank); and (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; 8.2 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 8.3 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of 8 accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 9 NOTICES ------- All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A Party may change its notice address by giving the other Party written notice. 10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER ------------------------------------------ California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Orange County, California. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 11 GENERAL PROVISIONS ------------------ 11.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 11.2 INDEMNIFICATION Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demand, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 11.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 11.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 11.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior 9 agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 11.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 11.7 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 11.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 11.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing information. 12 DEFINITIONS ----------- In this Agreement: "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the Committed Revolving Line. "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "BANK EXPENSES" are all audit fees and expenses and reasonable costs or expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or insolvency Proceedings). "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "CLOSING DATE" is the date of this Agreement. "COLLATERAL" is the collateral defined in the Third Party Security Agreement. "COMMITTED REVOLVING LINE" is an Advance of up to $2,100,000. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as 10 an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates for commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other arrangement. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "GAAP" is generally accepted accounting principles. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "LOAN DOCUMENTS" are, collectively, this Agreement, the Third Party Security Agreement, any note, or notes or guaranties executed by Borrower, Pledgor or guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including letters of credit and exchange contracts and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "PERSON" in any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PLEDGOR" is Premier Laser Systems, Inc. as defined in Third Party Security Agreement. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING MATURITY DATE" is September 24, 1998. "SCHEDULE" is any attached schedule of exceptions. "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. 11 "Third Party Security Agreement" is that Third Party Security Agreement of every date between Pledgor and Bank. BORROWER: EYESYS TECHNOLOGIES, INC. By: /s/ MICHAEL HIEBERT ----------------------------- Title: CFO -------------------------- BANK: SILICON VALLEY BANK By: /s/ ROBERT ANDERSON ----------------------------- Title: AVP -------------------------- 12 CORPORATE BORROWING RESOLUTION BORROWER: EYESYS TECHNOLOGIES, INC. BANK: SILICON VALLEY BANK 2776 BINGLE ROAD 18872 MACARTHUR BLVD, STE. 100 HOUSTON, TX 77055 IRVINE, CA 92812 I, the undersigned Secretary or Assistant Secretary of EYESYS TECHNOLOGIES, INC. ("Borrower"), HEREBY CERTIFY that Borrower is a corporation duly organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other duly authorized corporate action in lieu of a meeting), duly called and held, at which a quorum was present and voting, the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of Borrower, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ----------------- Michael Hiebert Secretary and CFO /s/ MICHAEL N. HIEBERT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- acting for and on behalf of Borrower and as its act and deed be, and they hereby are, authorized and empowered: Borrow Money. To borrow from time to time from Silicon Valley Bank ("Bank"), on such terms as may be agreed upon between the officers of Borrower and Bank, such sum or sums of money as in their judgment should be borrowed. Execute Loan Documents. To execute and deliver to Bank the loan documents of Borrower, on Bank's terms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of Borrower to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the loan documents, or any portion of the loan documents. Grant Security. To grant a security interest to Bank in any of Borrower's assets, which security interest shall secure all of Borrower's obligations to Bank. Negotiate Items. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to Borrower or in which Borrower may have an interest, and other to receive cash for the same or to cause such proceeds to be credited to the account of Borrower with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. Letters of Credit. To execute letter of credit applications and other related documents pertaining to Bank's issuance of letters of credit. Foreign Exchange Contracts. To execute and deliver foreign exchange contracts, either spot or forward, from time to time, in such amount as, in the judgment of the officer or officers herein authorized. Issue Warrants. To issue warrants to purchase Borrower's capital stock, for such class, series and number, and on such terms, as an officer of Borrower shall deem appropriate. Further Acts. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements, including agreements waiving the right to a trial by jury, as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these Resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of Borrower's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the persons named above are principal officers of the Corporation and occupy the positions set opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that they are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on September 24, 1997 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: x /s/ MICHAEL N. HEIBERT ------------------------------------- Secretary or Assistant Secretary x ------------------------------------- *NOTE: In case the Secretary or other certifying officer is designated by the foregoing resolutions as one of the signing officers, this resolution should also be signed by a second Officer or Director of Borrower. 2 THIRD PARTY SECURITY AGREEMENT This THIRD PARTY SECURITY AGREEMENT is entered into as of September 24, 1997, by and between SILICON VALLEY BANK ("Bank") and Premier Laser Systems, Inc. ("Pledgor") RECITALS -------- EYESYS TECHNOLOGIES, INC. ("Borrower") wishes to borrow money from time to time from Bank pursuant to a Loan and Security Agreement of even date (the "Loan Agreement"). Bank has agreed to enter into the Loan Agreement, provided Pledgor secures the payment and performance obligations under the Loan Agreement in accordance with the terms of this Agreement. AGREEMENT --------- The parties agree as follows: 1. CREATION OF SECURITY INTEREST ----------------------------- 1.1 Grant of Security Interest. Pledgor grants to Bank a continuing -------------------------- security interest in the property described in Exhibit A attached hereto (the --------- "Collateral") in order to secure prompt repayment of any and all obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Agreement, as amended from time to time, and any other agreements entered into between Bank and Borrower (the "Loan Documents"). Such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. Borrower acknowledges that Bank may place a hold on the deposit account pledged as Collateral. 1.2 Delivery of Additional Documentation Required. Pledgor shall --------------------------------------------- from time to time execute and deliver to Bank, documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 2. REPRESENTATIONS AND WARRANTIES ------------------------------ Pledgor represents and warrants as follows: 2.1 Due Organization and Qualification. Pledgor is a corporation ---------------------------------- duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 2.2 Due Authorization; No Conflict. The execution, delivery, and ------------------------------ performance of this Agreement are within Pledgor's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Pledgor's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Pledgor is a party or by which Pledgor is bound. 2.3 No Prior Encumbrances. Pledgor has good and indefeasible title --------------------- to the Collateral, free and clear of any liens, security interests, or other encumbrances. 3. AFFIRMATIVE COVENANTS --------------------- Pledgor covenants and agrees that, until payment in full of all outstanding Obligations under the Loan Agreement and this Agreement, and for so long as Bank may have any commitment to make an Advance under the Loan Agreement, Pledgor shall do all of the following. 1 3.1 Good Standing. Pledgor shall maintain its corporate existence and ------------- its good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a material adverse effect on Pledgor's business. Pledgor shall maintain in force all licenses, approvals and agreements, the loss of which could have a material adverse effect on Pledgor's business. 3.2 Government Compliance. Pledgor shall comply with all statutes, --------------------- laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a material adverse effect on Pledgor's business. 4. NEGATIVE COVENANTS ------------------ Pledgor covenants and agrees that until payment in full of all outstanding Obligations under the Loan Agreement and this Agreement, Pledgor will not do any of the following: 4.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose ------------ of (collectively, a "Transfer"), all or any part of the Collateral other than: (i) Transfers in the ordinary course of business; (ii) Transfers of non- exclusive licenses and similar arrangements for the use of the Collateral; or (iii) Transfers of worn-out or obsolete Equipment. 4.2 Change in Business Location. Without thirty (30) days prior --------------------------- written notification to Bank, relocate its chief executive office. 4.3 Encumbrances. Create, incur, assume or suffer to exist any ------------ security interest, lien or encumbrance with respect to the collateral. 5. EVENTS OF DEFAULT ----------------- Any one or more of the following events shall constitute an Event of Default by Pledgor under this Agreement: 5.1 Loan Documents. If an Event of Default occurs under any of the -------------- Loan Documents; 5.2 Covenant Default. If Pledgor fails or neglects to perform, keep, ---------------- or observe any material term, provision, condition, covenant, or agreement contained in this Agreement. 5.3 Attachment. If any portion of the Collateral is made the subject ---------- of a lien, security interest or other encumbrance, or is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Pledgor is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs. 5.4 Misrepresentations. If any material misrepresentation or material ------------------ misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 6. BANK'S RIGHTS AND REMEDIES -------------------------- 6.1 Rights and Remedies. Upon the occurrence and during the ------------------- continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Pledgor: (a) Exercise all rights available to it under the California Uniform Commercial Code and applicable law; 2 (b) Set off and apply to the obligations any and all (i) balances and deposits of Pledgor held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Pledgor held by Bank; and (c) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Pledgor's premises) as Bank determines is commercially reasonable. 6.2 Remedies Cumulative. Bank's rights and remedies under this ------------------- Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Pledgor's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. 6.3 Demand; Protest. Pledgor waives demand, protest, notice of --------------- protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Pledgor may in any way be liable. 7. NOTICES ------- Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by prepaid telefacsimile to Pledgor or to Bank, as the case may be, as its addresses set forth below: If to Pledgor: Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92618 Attn: ------------------------- FAX: ------------------------- If to Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054 Attn: ------------------------- FAX: ------------------------- The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 8. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER ------------------------------------------ This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Pledgor and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Orange, State of California. Pledgor AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THERIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS 3 REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL 9. GENERAL PROVISIONS ------------------ 9.1 Successors and Assigns. This Agreement shall bind and inure to ---------------------- the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder -------- ------- may be assigned by Pledgor without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Pledgor to sell, transfer, negotiate, or grant participations in all or any part of, or any interest in Bank's obligations, rights and benefits hereunder. 9.2 Indemnification. Pledgor shall defend, indemnify and hold --------------- harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Pledgor whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 9.3 Time of Essence. Time is of the essence for the performance of --------------- all obligations set forth in this Agreement. 9.4 Severability of Provisions. Each provision of this Agreement -------------------------- shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 9.5 Amendments in Writing Integration. This Agreement cannot be --------------------------------- changed or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 9.6 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 9.7 Survival. All covenants, representations and warranties made in -------- this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Pledgor to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in this Agreement shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 9.8 Amendment of Loan Documents. Pledgor authorizes Bank, without --------------------------- notice or demand and without affecting its liability hereunder, from time to time to (a) renew, extend, or otherwise change the terms of the Loan Documents or any part thereof; (b) take and hold security for the payment of the Loan Documents, and exchange, enforce, waive and release any such security; and (c) apply such security and direct the order or manner of sale thereof as Bank in its sole discretion may determine. 9.9 Pledgor Waivers. Pledgor waives any right to require Bank to (a) --------------- proceed against Borrower, any other guarantor or any other person; (b) proceed against or exhaust any security held from Borrower; (c) marshal any assets of Borrower; or (d) pursue any other remedy in Bank's power whatsoever. Bank may, at its election, exercise or decline or fail to exercise any right or remedy it may have against Borrower or any security held by Bank, including without limitation the right to foreclose upon any such security by judicial or nonjudicial sale, without affecting or impairing in any way the liability of Pledgor hereunder. Pledgor waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower. Pledgor waives any setoff, defense or counterclaim that Borrower may have against Bank. Pledgor waives any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or any other rights against Borrower. Pledgor shall have no right of subrogation or reimbursement, contribution or other rights against Borrower, and Pledgor waives any right to enforce any remedy that Bank 4 now has or may hereafter have against Borrower. Pledgor waives all rights to participate in any security now or security now or hereafter held by Bank by Bank. Pledgor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Pledge Agreement and of the existence, creation, or incurring of new or additional indebtedness. Pledgor assumes the responsibility for being and keeping itself informed of the financial condition of Borrower and of all other circumstances bearing upon the risk of nonpayment of any indebtedness or nonperformance of any obligation of Borrower, warrants to Bank that it will keep so informed, and agrees that absent a request for particular information by Pledgor, Bank shall have no duty to advise Pledgor of information known to Bank regarding such condition or any such circumstances. Pledgor waives the benefits of California Civil Code sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899, and 3433. 9.10 Borrower Insolvency. If Borrower becomes insolvent or is adjudicated ------------------- bankrupt or files a petition for reorganization, arrangement, composition or similar relief under any present or future provision of Unites States Bankruptcy Code, or if such a petition is filed against Borrower, and in any such proceeding some or all of any indebtedness or obligations under the Loan Documents are terminated or rejected or any obligation of Borrower is modified or abrogated, or if Borrower's obligations are otherwise avoided for insolvency, bankruptcy or any similar reason, Pledgor agrees that Pledgor's liability hereunder shall not thereby be affected or modified and such liability shall continue in full force and effect as if no such action or proceeding had occurred. This Agreement shall continue to be effective or be reinstated, as the case may be, if any payment must be returned by Bank upon the insolvency, bankruptcy or reorganization of Borrower, Pledgor, any other person, or otherwise, as though such payment had not been made. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. PLEDGOR: PREMIER LASER SYSTEMS, INC. BY: /s/ MICHAEL HIEBERT ------------------------ Title: CFO ------------------------ By: ------------------------ Title: ------------------------ BANK: SILICON VALLEY BANK By: /s/ ROBERT ANDERSON ------------------------ Title: AVP ------------------------ 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. PLEDGOR: PREMIER LASER SYSTEMS, INC. By: -------------------------- Title: ----------------------- By: Colette Cozean -------------------------- Title: CEO ----------------------- BANK: SILICON VALLEY BANK By: -------------------------- Title: ----------------------- 6 EX-10.33 3 1997 STOCK OPTION PLAN EXHIBIT 10.33 1997 STOCK OPTION PLAN OF PREMIER LASER SYSTEMS, INC. ARTICLE I GENERAL PROVISIONS ------------------ 1.1 Purpose. Premier Laser Systems, Inc. (the "Company") proposes to grant ------- ------- to selected officers, directors (whether or not they are employees), key employees (including officers and directors who are employees) of the Company (hereinafter referred to as "Eligible Optionees") and to key persons performing ------------------ services as independent contractors and not as employees or members of the Board of Directors ("Eligible Consultants") options to purchase shares of Class A -------------------- common stock, no par value, of the Company ("Common Stock") for the purposes of ------------ (i) furnishing to such Eligible Optionees and Eligible Consultants incentives to improve operations and increase profits of the Company, (ii) encouraging such Eligible Optionees to accept or continue employment or affiliation with the Company and its subsidiaries, and (iii) encouraging Eligible Consultants to begin or continue providing services to the Company. Such options will be granted pursuant to the plan herein set forth, which shall be known as the 1997 Stock Option Plan of Premier Laser Systems, Inc. (herein referred to as the "Plan"). - ----- Eligible Optionees and Eligible Consultants who are granted options pursuant to the Plan are sometimes collectively referred to herein as "Optionees." --------- 1.2 Shares Subject to the Plan. Subject to adjustment as provided in -------------------------- Section 1.4 and Section 1.10.3 (the "Adjustment Provisions"), the aggregate - ----------- -------------- --------------------- number of shares of Common Stock to be delivered upon exercise of all options granted under the Plan shall not exceed 1,500,000 shares. The shares of Common Stock issuable upon exercise of options granted under the Plan may be authorized and unissued shares or reacquired shares. In the event the number of shares to be delivered upon the exercise in full of any option granted under the Plan is reduced for any reason whatsoever or in the event any option granted under the Plan for any reason shall expire or shall terminate unexercised as to all or any shares covered thereby, the number of shares no longer subject to any such option shall thereupon be released from such option and shall thereafter be available to be re-optioned under the Plan. The Board of Directors (the "Board"), the Compensation Committee of the Board or such other committee of the ----- Board which shall succeed to the functions and responsibilities of the Compensation Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding options under the Plan, and/or (ii) with the consent of the affected holders of options, the cancellation of any outstanding options under the Plan and the grant in substitution therefor of new options under the Plan pursuant to terms consistent therewith, covering the same or different numbers of shares of stock. For purposes hereof, the term "Committee" shall refer to either the full Board, if --------- the full Board is administering this Plan, or to the committee appointed by the Board to administer this Plan. Shares issued pursuant to the exercise of options granted under the Plan shall be fully paid and nonassessable. 1.3 Administration of the Plan. Subject to the provisions of the Plan, the -------------------------- Committee shall have the authority to (a) determine the provisions of the options to be granted under the Plan, (b) interpret the Plan and all options granted under the Plan, (c) adopt, amend or rescind such rules as it deems necessary for the proper administration of the Plan, (d) make all other determinations necessary or advisable for the administration of the Plan, and (e) correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option granted under the Plan in the manner and to the extent that the Committee deems desirable to carry the Plan or any option into effect. The Board of Directors shall have the power to add or remove members of the Committee from time to time, to fill vacancies thereon arising by resignation, death, removal, or otherwise, and shall designate a chairman from among the members of the Committee, which chairman shall preside at all meetings of the Committee. Meetings shall be held at such times and places as shall be determined by the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business, and the vote of a majority of those members present at any meeting shall decide any question brought before that meeting. The actions of the Committee in exercising all of the rights, powers and authorities set out in the Plan, when performed in good faith and in its sole judgment, shall be final and conclusive. The Committee shall consist of at least two members of the Board of Directors. The members of the Committee shall be solely "outside directors," within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and applicable interpretive authority thereunder (including ---- the transitional rules of Proposed Treasury Regulation Section 1.162-27). 1.4 Amendment and Discontinuance of the Plan. The Board of Directors may ---------------------------------------- amend, suspend or terminate the Plan. 1.5 Granting of Options to Employees. The Committee shall have authority to -------------------------------- grant, prior to the expiration date of the Plan, to Eligible Optionees and Eligible Consultants options to purchase, on the terms and conditions hereinafter set forth in Article II, authorized but unissued, or reacquired, ---------- shares of Common Stock, provided such grants shall be made only to those Eligible Optionees and Eligible Consultants, in such amounts and at such times as determined in the discretion of the Committee, and, for this purpose, the Committee may consider the Eligible Optionee's or Eligible Consultant's office or position, degree of responsibility for, and contribution to, the growth and success of the Company, length of service, promotions, potential and any other factors which it may deem relevant. All options granted to Eligible Optionees and Eligible Consultants under the Plan shall be hereinafter referred to as "nonqualified options." - --------------------- 1.6 Option Agreements. Each option granted under the Plan shall be ----------------- evidenced by a written agreement between the Company and the applicable Optionee and shall contain such terms and conditions, and may be exercisable for such periods, as may be approved by the Committee, which terms and conditions need not be identical but which must be in compliance with the terms and provisions hereof. 1.7 Effective Date. The Plan shall become effective as of the date the Plan -------------- is approved by the Board (the "Effective Date"). Except with respect to options -------------- then outstanding, if not sooner terminated under Section 1.4, the Plan shall ----------- terminate upon, and no further options shall be granted after, the expiration of ten years from the Effective Date. 1.8 Recapitalization or Reorganization. If at any time or from time to time ---------------------------------- after the grant of any option hereunder there is a capital reorganization of the Common Stock, then the Optionee shall be entitled to receive upon the exercise of an option, in lieu of the Common Stock, the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon exercise of such option would have been entitled as a result of such capital reorganization. If the Company shall merge with another corporation and the Company is the surviving corporation in such merger and under the terms of such merger the Common Stock outstanding immediately prior to the merger remain outstanding and unchanged, any option granted hereunder shall continue to apply to the Common Stock thereto and shall also pertain and apply to any additional securities and other property, if any, to which a holder of the number of shares of Common Stock deliverable upon exercise of such option would have been entitled as a result of the merger. If (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or -2- survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, or (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Act"), acquires or gains ownership or control (including, without --- limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), (each such event is referred to herein as a "Corporate Change"), then all options granted hereunder, ---------------- including that portion not then otherwise vested, shall become exercisable in full effective immediately prior to the consummation of the Corporate Change, provided that the exercise of any such option that would not have been vested in the absence of the Corporate Change shall be conditioned upon the occurrence of the Corporate Change (i.e., so that if the Corporate Change does not subsequently occur, the unvested portion of the option shall vest according to its original terms). 1.9 Foreign Options and Rights. The Committee may grant options to -------------------------- Eligible Optionees and Eligible Consultants who are subject to the tax laws of nations other than the United States, which options may have terms and conditions as determined by the Committee as necessary to comply with applicable foreign laws. The Committee may take any action which it deems advisable to obtain approval of any such option by the appropriate foreign governmental entity; provided, however, that no such option may be granted pursuant to this Section 1.9 and no action may be taken which would result in a violation of the - ----------- Act, the Code or any other applicable law. 1.10 General Terms and Conditions of Options. Options granted under the --------------------------------------- Plan shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with law or the Article pursuant to which such option was granted, as the Committee shall deem desirable: 1.10.1 Manner of Exercise. In order to exercise all or a portion of ------------------ any option granted under the Plan, an Optionee shall deliver to the Company payment in full of the shares then being purchased, together with any required withholding tax. The payment of such exercise price and any required withholding tax shall either be in cash or through delivery to the Company of shares of Common Stock, or by any combination of cash or shares; provided that no shares of the Company's Common Stock may be delivered in payment of such exercise price if such delivery would be in violation of the Act, including but not limited to, Section 16 thereof. The value of each share of Common Stock so delivered shall be deemed to be equal to the per share price of the last sale of Common Stock on the trading day immediately preceding the date the option is exercised (or the closing bid if no sales were reported), based on the composite transactions in the Common Stock as reported in The Wall Street Journal (or any successor publication thereto). If the Committee so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to, or for resale in connection with, any distribution of such shares. An option agreement may, in the discretion of the Committee, provide for other methods to pay for, or otherwise exercise, an option. An option agreement also may, in the discretion of the Committee, provide for the withholding of Federal, state or local income tax upon exercise of an option from any cash or stock remuneration (from the Plan or otherwise) then or thereafter payable by the Company to the Optionee. To the extent provided by the terms of an option agreement, the Optionee may, at the discretion of the Committee, satisfy any mandatory federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under an option by any of the following means or by a combination of such means: (1) tendering cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionee as a result of the exercise or -3- acquisition of stock under the option provided that such arrangement will not result in a charge to the Company's reported earnings in excess of that which the Company is willing to accept; or (3) delivering to the Company owned and unencumbered shares of the Common Stock of the Company if (i) such delivery would not be in violation of the Act, including but not limited to, Section 16 thereof, and (ii) such delivery would not create a charge to the Company's reported earnings in excess of that which the Company is willing to accept. The exercise of the option may be conditioned upon the receipt by the Company of satisfactory evidence of the Optionee's satisfaction of any withholding obligations. 1.10.2 Options not Transferable. No option granted under the Plan ------------------------ shall be transferable otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Optionee, such option shall be exercisable only by the Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any option granted under the Plan, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the option with respect to the shares involved in such attempt. 1.10.3 Adjustment of Shares. In the event that at any time after the -------------------- Effective Date the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares subject to the Plan (including shares as to which all outstanding options granted under the Plan, or portions thereof then unexercised, shall be exercisable), to the end that after such event the shares subject to the Plan and each Optionee's proportionate interest shall be maintained as if such Optionee had exercised the option before the occurrence of such event. Such adjustment in an outstanding option granted under the Plan shall be made without change in the total price applicable to such option or the unexercised portion of such option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in exercise price per share. Any such adjustment made by the Committee shall be final, conclusive and binding upon all Optionees, the Company, and all other interested persons. 1.10.4 Listing and Registration of Shares. Each option granted under ---------------------------------- the Plan shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee. 1.10.5 Amendments. The Committee may, with the consent of the person ---------- or persons entitled to exercise any outstanding option granted under the Plan, amend such option. The Committee may at any time or from time to time, in its discretion, in the case of any option previously granted under the Plan which is not then immediately exercisable in full, accelerate the time or times at which such option may be exercised to any earlier time or times. -4- 1.10.6 Miscellaneous. ------------- (a) The person or persons entitled to exercise, or who have exercised, any option granted under the Plan shall not be entitled to any rights as a shareholder of the Company with respect to any shares subject to such option until such person shall have become the beneficial owner of such shares. (b) No nonqualified option granted under the Plan shall be construed as limiting any right which the Company or any subsidiary of the Company may have to terminate at any time, with or without cause, the employment of any person to whom such nonqualified option has been granted. (c) Notwithstanding any provision of the Plan or the terms of any option granted under the Plan, the Company shall not be required to issue any shares hereunder or thereunder if such issuance would, in the judgment of the Committee, constitute a violation of any state or Federal law or of the rules or regulations of any governmental regulatory body. ARTICLE II NONQUALIFIED OPTIONS -------------------- 2.1 Eligible Optionees. All Eligible Optionees and Eligible Consultants ------------------ shall be eligible to receive nonqualified options under this Article II. ---------- 2.2 Calculation of Exercise Price. The exercise price to be paid for each ----------------------------- share of Common Stock deliverable upon exercise of each nonqualified option granted under Article II shall be determined by the Committee and may be more or ---------- less than, or equal to, the fair market value per share of Common Stock at the time of grant as determined by the Committee. The exercise price for each nonqualified option shall be subject to adjustment as provided in the Adjustment Provisions. 2.3 Terms and Conditions of Options. Nonqualified options granted under ------------------------------- this Article II shall be in such form as the Committee may from time to time ---------- approve, shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with this Article II, as ---------- the Committee shall deem desirable: 2.3.1 Option Period and Conditions and Limitations on Exercise. -------------------------------------------------------- Subject to Section 1.10.5, no nonqualified option shall be exercisable by an -------------- Eligible Optionee or Eligible Consultant later than the date which is the date determined by the Committee upon the grant thereof (the "Option ------ Expiration Date") which shall be no later than ten years after the date of --------------- grant. To the extent not prohibited by other provisions of the Plan, each nonqualified option granted to an Eligible Optionee or Eligible Consultant shall be exercisable at such time or times as the Committee in its discretion may determine at or prior to the time such option is granted. In the event the Committee makes no such determination, each nonqualified option granted to an Eligible Optionee or Eligible Consultant shall be exercisable from time to time, in whole or in part, at any time prior to the Option Expiration Date. 2.3.2 Termination of Employment or Relationship as Eligible Consultant; ----------------------------------------------------------------- Death. For purposes of this Article II and each nonqualified option granted ----- ---------- under this Article II, an Eligible Optionee's employment and a Eligible ---------- Consultant's relationship with the Company shall be deemed -5- to have terminated at the close of business on the day preceding the first date on which such Eligible Optionee or Eligible Consultant no longer for any reason whatsoever (including the death of such Eligible Optionee or Eligible Consultant) is employed by, or has a relationship with, the Company or a subsidiary of the Company. An Eligible Optionee shall be considered to be in the employment of the Company or a subsidiary of the Company as long as such Eligible Optionee remains an employee of the Company or a subsidiary of the Company, whether active or on any authorized leave of absence. An Eligible Consultant shall be considered to have a relationship with the Company as long as such Eligible Consultant has an executory assignment from Company personnel authorized to make such an assignment. Any question as to whether and when there has been a termination of such employment or relationship, and the cause of such termination, shall be determined by the Committee and its determination shall be final and conclusive. If an Eligible Optionee's employment or a Eligible Consultant's relationship is terminated for any reason whatsoever (including the death of such Eligible Optionee or Eligible Consultant), each nonqualified option thereunto granted under this Article II and all rights thereunder shall wholly and completely ---------- terminate as follows: (a) With respect to nonqualified options not then exercisable, at the time the Eligible Optionee's employment or a Eligible Consultant's relationship is terminated; and (b) With respect to nonqualified options then exercisable: (i) At the time the Eligible Optionee's employment or term as a director (if not an employee) or a Eligible Consultant's relationship is terminated if such person's employment, term or relationship is terminated because such person has committed fraud, theft or embezzlement against the Company or a subsidiary, affiliated entity or customer of the Company, or for conflict of interest (other than legitimate competition); or (ii) At the expiration of a period of one year after the Eligible Optionee's or Eligible Consultant's death (but in no event later than the Option Expiration Date) if the Eligible Optionee's employment or Eligible Consultant's relationship is terminated by reason of such person's death. Any such nonqualified option may be exercised by the Eligible Optionee's or Eligible Consultant's estate or by the person or persons who acquire the right to exercise such nonqualified option by bequest or inheritance; or (iii) At the expiration of a period of three years (but in no event later than the Option Expiration Date) after the Eligible Optionee's employment is terminated because of retirement or the Eligible Optionee's employment or term or the Eligible Consultant's relationship is terminated because of disability, if the Eligible Optionee's employment or term has terminated because of retirement or disability or the Eligible Consultant's relationship has terminated because of disability; or (iv) At the expiration of a period of three months after the Eligible Optionee's or Eligible Consultant's employment or relationship is terminated (but in no event later than the Option Expiration Date) if the Eligible Optionee's employment or term or Eligible Consultant's relationship is terminated for any reason other than the reasons specified in Section 2.3.2(b)(i)-(iii). -6- NONSTATUTORY STOCK OPTION AGREEMENT (1997 Stock Option Plan) THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "Agreement") is made and --------- entered into as of __________________, 1997, by and between ___________________ (the "Optionee") and PREMIER LASER SYSTEMS, INC., a California corporation (the -------- "Company"). ------- A. The Board of Directors of this Company has adopted the 1997 Stock Option Plan (the "Plan") which provides for the granting of options to selected ---- officers, directors (whether or not they are employees), key employees (including officers and directors who are employees) of the Company and key persons performing services for the Company as independent contractors. The terms of this Agreement are governed solely by the Plan, a copy of which has been provided to Optionee. B. The Board has authorized the grant of options to purchase Common Stock of the Company pursuant to the terms and conditions set forth herein and in the Plan. This option is not intended to qualify as and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). ---- C. Before making any decision concerning the Plan, this Agreement or an exercise of any option granted hereby, Optionee is advised to read the Plan and consult with an attorney and a tax advisor. THE UNTIMELY EXERCISE OF THE OPTION GRANTED HEREBY AND THE SALE OF STOCK ACQUIRED AS A RESULT OF SUCH EXERCISE MAY CAUSE OPTIONEE TO INCUR LIABILITIES UNDER THE TAXATION AND SECURITIES LAWS OF WHICH OPTIONEE MAY BE OTHERWISE UNAWARE WITHOUT SEEKING THE ADVICE OF ADVISORS. AGREEMENT --------- NOW, THEREFORE, the parties agree as follows: 1. Grant to Optionee. ----------------- The Company hereby grants to Optionee, subject to the terms and conditions of the Plan and subject to the terms and conditions herein set forth herein, an option (the "Option") to purchase from the Company all or any part of an ------ aggregate of _____________ shares of the Company's Class A Common Stock ("Common ------ Stock"). - ----- 2. Exercise of the Option. ---------------------- (a) Exercise Price. The exercise price of this Option is $________ per share. Payment of the exercise price per share is due in full upon exercise of all or any part of this Option. Optionee may elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash (including check) at the time of exercise; (ii) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings in excess of that which the Company is willing to accept, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value, which is the per share price of the last sale of Common Stock on the trading day immediately preceding the date the Option is exercised (or the closing bid if no sales were reported), based on the composite transactions in the Common Stock as reported in the Wall Street Journal (or any successor publication thereto) (the "Fair Market Value"); ----------------- (iii) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, and provided further, that the cashless exercise will not result in a charge to the Company's earnings, in excess of that which the Company is willing to accept, payment by delivery and surrender of this Option with a Cashless Exercise Notice (in the form attached hereto as Exhibit B). In the event of a cashless exercise, the Optionee shall exchange the Option for such number of shares of Common Stock underlying the Option determined by multiplying the number of shares by a fraction, the numerator of which shall be the difference between the Fair Market Value per share of the Common Stock and the exercise price per share of the Option, the denominator of which shall be the Fair Market Value per share of the Common Stock; (iv) To the extent permitted by applicable law, payment by a combination of the methods of payment permitted by Sections 2(a)(i), (ii) ---------------------- and (iii) above. --------- (b) Exercise Notice. In order to exercise this Option, Optionee or any --------------- other person or persons entitled to exercise the Option shall give written notice to the Secretary of the Company or to such other person as may be designated by the Company, in the form set forth on Exhibit A or Exhibit B hereto, specifying the number of shares to be purchased. This notice shall be accompanied by payment of the exercise price for the shares as provided in Section 2(a). Optionee shall also deliver such additional documents as the - ------------ Company may then require pursuant to the Plan. -2- (c) Compliance with Securities Laws. Notwithstanding anything to the ------------------------------- contrary contained herein, this Option may not be exercised unless the shares issuable upon exercise of this Option are then registered under the Act, or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"). --- (d) Additional Terms and Conditions. By exercising this Option, Optionee ------------------------------- agrees that the Company may require (as a condition to the exercise of this Option) Optionee to enter an arrangement providing for the payment by Optionee to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of the Option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise. 3. Vesting Schedule. ---------------- Subject to the conditions and limitations contained herein, ___________ shares will vest on ____________, 1998, thereafter ________ shares will vest on ____________, 1999, and the remaining ___________ shares will vest on ____________, 2000. Vested installments may be exercised in whole or in part, and, to the extent not exercised, will accumulate and be exercisable at any time on or before the termination of the Option; provided however, that this Option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. Notwithstanding the above, the vesting of shares subject to this Option shall accelerate upon the terms and conditions set forth in Section 1.10 of the Plan. 4. Expiration Date. --------------- The Option shall terminate and expire at 5:00 p.m., California time, on ________, 2007 (which date shall not be more than ten (10) years from the date this Option is granted), or such earlier time as may be required by the Plan if Optionee ceases to be employed or retained by the Company or ceases to be a member of the Board of Directors. In no event may this Option be exercised after the date on which it terminates. This Option shall terminate prior the expiration of its term as follows: ninety days (90) days after the termination of Optionee's employment with or engagement by the Company or an affiliate for any reason or for no reason unless: (i) Disability/Retirement. Such termination is due to Optionee's --------------------- permanent and total disability (within the meaning of Section 422(c)(6) of the Code) or to the retirement of an Optionee who is an employee of the Company, in which event the Option shall terminate on the earlier of the termination date set forth above or thirty-six (36) months following such termination; or (ii) Death. Such termination is due to Optionee's death, in which ----- event the Option shall terminate on the earlier of the termination date set forth above or twelve (12) months after Optionee's death; or -3- (iii) Removal for Cause. Such termination is due Optionee's commission ----------------- of fraud, theft or embezzlement against the Company or a subsidiary, affiliated entity or customer of the Company, or for conflict of interest (other than legitimate competition), in which event the Option shall terminate at the time Optionee's employment or engagement is terminated. (iv) Section 16(b) Liability. Exercise of the Option within ninety ----------------------- (90) days after the termination of Optionee's employment with or engagement by the Company or with an affiliate would result in liability under section 16(b) of the Securities Exchange Act of 1934, as amended, in which case the Option will terminate on the earlier of (i) the tenth (10th) day after the last date upon which exercise would result in such liability or (ii) six (6) months and ten (10) days after the termination of Optionee's employment with or engagement by the Company or an affiliate. Notwithstanding the foregoing, this Option may be exercised following termination of Optionee's employment or engagement by the Company or an affiliate only as to that number of shares as to which it was exercisable on the date of such termination under the provisions of Section 3 of this Option. --------- 5. Nontransferable. --------------- This Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during Optionee's life only by Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, the Option, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the Option with respect to the shares involved in such attempt. 6. No Right to Continued Employment or Engagement by the Company. ------------------------------------------------------------- This Agreement is not an employment contract and nothing in this Option shall be deemed to create in any way whatsoever any obligation on Optionee's part to continue in the employ of the Company, or of the Company or an affiliate to continue Optionee's employment with the Company or an affiliate. In the event that this Option is granted to Optionee in connection with the performance of services as a consultant or director, references to employment, employee and similar terms shall be deemed to include the performance of services as a consultant or a director, as the case may be; provided however, that no rights as an employee shall arise by reason of the use of such terms. 7. No Rights as a Shareholder. -------------------------- The holder of this Option shall not have any of the rights of a shareholder with respect to the shares subject to the Option until such holder shall have exercised the option and paid the exercise price. -4- 8. Notices. ------- Any notices provided for in this Option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or five (5) days after deposit in the United States mail, postage prepaid, certified mail addressed to Optionee or the Company at the address specified below or at such other address as the parties may hereafter designate by written notice: Optionee: _________________________________________ _________________________________________ _________________________________________ The Company: Premier Laser Systems, Inc. 3 Morgan Irvine, California 92178 Attn: Corporate Secretary 9. Subject to the Plan. ------------------- This Option is subject to all the provisions of the Plan, a copy of which has been provided to Optionee, and its provisions are hereby made a part of this Option. Optionee acknowledges receipt of a copy of the Plan. This Option is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this Option and those of the Plan, the provisions of the Plan shall control. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first set forth above. "Company" PREMIER LASER SYSTEMS, INC. a California corporation By:______________________________________ Title:___________________________________ "Optionee" _________________________________________ _________________________________________ Social Security No.:_____________________ -5- EXHIBIT A EXERCISE NOTICE Premier Laser Systems, Inc. 3 Morgan Irvine, California 92718 Attention: Corporate Secretary Re: Exercise of Stock Option ------------------------ Ladies and Gentlemen: Pursuant to Section 2 of that certain Nonqualified Stock Option Agreement (the "Agreement") between the undersigned and Premier Laser Systems, Inc., a --------- California corporation (the "Company"), the undersigned hereby elects to ------- exercise the option granted thereby to purchase _________ shares of Class A Common Stock of the Company at a price of $__________ per share. Accompanying this Notice is the payment in full for such shares as permitted by the terms of the 1997 Stock Option Plan, which Plan is specifically made a part of this Agreement and has been read and understood by the undersigned. The undersigned represents and warrants to the Company that the undersigned is acquiring the shares for investment only and not with a view to distribution or resale. Dated:________________ ________________________________________ Signature ________________________________________ Print Name ________________________________________ Please print here the exact name desired to be on the stock certificate and the records of the Company. -6- EXHIBIT B CASHLESS EXERCISE NOTICE Premier Laser Systems, Inc. 3 Morgan Irvine, California 92718 Attention: Corporate Secretary Re: Cashless Exercise of Stock Option --------------------------------- Ladies and Gentlemen: Pursuant to Section 2(a)(iii) of that certain Nonqualified Stock Option Agreement (the "Agreement") between the undersigned and Premier Laser Systems, --------- Inc., a California corporation (the "Company"), the undersigned hereby ------- irrevocably elects to exchange the Option granted thereby for ___________ shares of Class A Common Stock of the Company, as permitted by the terms of the 1997 Stock Option Plan, which Plan is specifically made a part of this Agreement and has been read and understood by the undersigned. If the number of shares referenced in this Cashless Exercise Notice shall not be all of the shares exchangeable or purchasable under the Option, a new Agreement shall be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder rounded up to the next higher number of shares. The undersigned represents and warrants to the Company that the undersigned is acquiring the shares for investment only and not with a view to distribution or resale. Dated:______________ _______________________________________ Signature _______________________________________ Print Name _______________________________________ Please print here the exact name desired to be on the stock certificate and the records of the Company. NOTE: This form may only be used if the cashless exercise will not result in a charge to the Company's reported earnings. -7- EX-10.34 4 1998 STOCK OPTION PLAN EXHIBIT 10.34 PREMIER LASER SYSTEMS, INC. 1998 STOCK OPTION PLAN ARTICLE I GENERAL PROVISIONS ------------------ 1.1 Purpose. Premier Laser Systems, Inc. (the "Company") proposes to grant ------- to selected "Eligible Employees" and "Eligible Consultants" (as defined below) options to purchase shares of Class A common stock, no par value, of the Company ("Common Stock") for the purposes of (i) furnishing to such persons incentives to improve operations and increase profits of the Company, (ii) encouraging such persons to accept or continue employment with the Company and its "Affiliates" (as defined below) and (iii) encouraging such persons to begin or continue providing services to the Company. For purposes hereof, the term "subsidiary" shall have the meaning set forth in Rule 405 promulgated under the Securities Act of 1933, as amended. The term "Eligible Employees" shall mean employees (including officers and directors who are employees) of the Company or its subsidiaries, and the term "Eligible Consultants" shall mean persons performing services for the Company or a subsidiary of the Company as independent contractors and not as employees or members of the Board of Directors. The Company also proposes to grant to those members of the Board of Directors of the Company (the "Board of Directors") who are not officers or employees of the Company at the time of a grant (such persons being hereinafter referred to as "Non-Employee Directors") options to purchase shares of Common Stock pursuant to the Plan. The purpose of such grants is to (i) provide incentives for highly qualified individuals to stand for election to the Board of Directors and continue service on the Board of Directors, (ii) provide incentives to promote long-term shareholder value, and (iii) promote a greater identity of interest between Non-Employee Directors and the Company's shareholders. Eligible Employees, Eligible Consultants and Non-Employee Directors who are granted options pursuant to the Plan are sometimes collectively referred to herein as "Optionees." The plan herein set forth shall be known as the 1998 Stock Option Plan of Premier Laser Systems, Inc. (and is herein referred to as the "Plan"). 1.2 Shares Subject to the Plan. Subject to adjustment as provided in -------------------------- Section 1.4 and Section 1.11.3 (the "Adjustment Provisions"), the aggregate number of shares of Common Stock to be delivered upon exercise of all options granted under the Plan shall not exceed 1,500,000 shares. The shares of Common Stock issuable upon exercise of options granted under the Plan may be authorized and unissued shares or reacquired shares. In the event the number of shares to be delivered upon the exercise in full of any option granted under the Plan is reduced for any reason whatsoever or in the event any option granted under the Plan for any reason shall expire or shall terminate unexercised as to all or any shares covered thereby, the number of shares no longer subject to any such option shall thereupon be released from such option and shall thereafter be available to be re-optioned under the Plan, subject to the limitations, if any, imposed by the Internal Revenue Code of 1986, as amended (the "Code") on the availability for regrant of options previously granted pursuant to Article III. The Compensation Committee of the Board of Directors or such other committee of the Board of Directors which shall succeed to the functions and responsibilities of the Compensation Committee, or as shall otherwise be delegated the responsibility of administering the Plan (the "Committee") shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding options under the Plan, and/or (ii) with the consent of the affected holders of options, the cancellation of any outstanding options under the Plan and the grant in substitution therefor of new options under the Plan pursuant to terms consistent therewith, covering the same or different numbers of shares of stock, provided, however, that no option granted pursuant to Article III shall be repriced or regranted on terms that would constitute a "modification" within the meaning of Section 424(h)(3) of the Code which would disqualify such option as an incentive stock option described in Section 422 of the Code unless the Company and the holder of such option shall so agree. Shares issued pursuant to the exercise of options granted under the Plan shall be fully paid and nonassessable. 1.3 Administration of the Plan. Subject to the provisions of the Plan, the -------------------------- Committee shall have the authority to (a) determine which persons shall be granted Options under the Plan, (b) determine the provisions of the options to be granted under the Plan, (c) interpret the Plan and all options granted under the Plan, (d) adopt, amend or rescind such rules as it deems necessary for the proper administration of the Plan, (e) make all other determinations necessary or advisable for the administration of the Plan, and (f) correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option granted under the Plan in the manner and to the extent that the Committee deems desirable to carry the Plan or any option into effect. The Board of Directors shall have the power to add or remove members of the Committee from time to time, to fill vacancies thereon arising by resignation, death, removal, or otherwise, and shall designate a chairman from among the members of the Committee, which chairman shall preside at all meetings of the Committee. Meetings shall be held at such times and places as shall be determined by the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business, and the vote of a majority of those members present at any meeting shall decide any question brought before that meeting. The actions of the Committee in exercising all of the rights, powers and authorities set out in the Plan, when performed in good faith and in its sole judgment, shall be final and conclusive. When appropriate, the Plan shall be administered in order to qualify certain of the options granted hereunder as "incentive stock options" described in section 422 of the Code. The Committee shall consist of at least two members of the Board of Directors. Notwithstanding any provision of the Plan, the Committee may not exercise any discretion with respect to any option granted hereunder which would be inconsistent with the intent that the Plan meet the requirements of Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), or any similar or successor rule. If any Plan provision is found not to be in compliance with Rule 16b-3 or Section 162(m) of the Code ("Section 162(m)"), that provision shall be deemed amended so that the Plan does so comply, to the extent permitted by law and deemed advisable by the Committee, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3 and Section 162(m). 1.4 Amendment and Discontinuance of the Plan. The Board of Directors may ---------------------------------------- amend, suspend or terminate the Plan; provided, however, that each such amendment of the Plan (a) extending the period within which options may be granted under the Plan, (b) increasing the aggregate number of shares of Common Stock to be optioned under the Plan except as provided in the Adjustment Provisions, (c) materially modifying the requirements as to eligibility of employees or consultants receiving options under, or changing the eligibility of employees or consultants or class of employees or consultants to whom options may be granted under, Article II or III, as applicable, or (d) materially increasing the benefits to optionees under the Plan, shall, in each case, be subject to approval by the shareholders of the Company (but only if such amendment is required to be approved under the Code, the Act, the rules promulgated under the Code or the Act, or the rules of any exchange (including the Nasdaq Stock Market) on which the Company's securities are listed); and provided further, however, that no amendment, suspension or termination of the Plan shall be made which may cause the Plan to fail to meet the requirements of Rule 16b-3 or may, without the consent of the holder of an option granted under Article II or III, terminate such option or adversely affect such person's rights in any material respect (except as set forth in the Plan). Furthermore, the Board of Directors may alter, amend, suspend, discontinue or terminate the Plan and any option granted hereunder, without the approval of the shareholders of the Company or any holder of any option thereby affected, if necessary in order to (a) enable the Plan and any option granted hereunder intended to be so qualified, to qualify for (i) the exemption provided by Rule 16b-3, (ii) the benefits provided under section 422 of the Code, or (iii) the exclusion for qualified performance-based compensation under Section 162(m) and the applicable interpretive authority thereunder, and (b) comply with changes in the Code, the Employee Retirement Income Security Act or any other applicable law (including, with respect to any of the foregoing, changes in any rule, regulation or other interpretive authority). 1.5 Granting of Options to Employees. The Committee shall have authority to -------------------------------- grant, prior to the expiration date of the Plan, to (i) Eligible Employees, Eligible Consultants and Non-Employee Directors options to purchase, on the terms and conditions hereinafter set forth in Article II, and (ii) Eligible Employees options to purchase, on the terms and conditions hereinafter set forth in Article III, authorized but unissued, or reacquired, shares of Common Stock, provided such grants shall be made only to those Optionees, in such amounts and at such times as determined in the discretion of the Committee, and, for this purpose, the Committee may consider the Optionee's office or position, degree of responsibility for, and contribution to, the growth and success of the Company, length of service, promotions, potential and any other factors which it may deem relevant. Options granted to Eligible Employees under Section III shall be "incentive stock options" within the meaning of section 422(b) of the Code, and are hereinafter referred to as "incentive stock options." All other options granted to Optionees under the Plan shall be granted pursuant to Article II, and are hereinafter referred to as "nonqualified options." 1.6 Option Agreements. Each option granted under the Plan shall be ----------------- evidenced by a written agreement ("Stock Option Agreement") between the Company and the applicable optionee and shall contain such terms and conditions, and may be exercisable for such periods, as may be approved by the Committee, which terms and conditions need not be identical but which must be in compliance with the terms and provisions hereof. 1.7 Effective Date. The Plan shall become effective as of the date the Plan -------------- is approved by the Board (the "Effective Date"). No options granted prior to the approval of the Plan by the shareholders of the Company shall be exercisable until such approval is received. Except with respect to options then outstanding, if not sooner terminated under Section 1.4, the Plan shall terminate upon, and no further options shall be granted after, the expiration of ten years from the Effective Date. 1.8 Rule 16b-3 Compliance. The Company intends: --------------------- (a) that the Plan meet the requirements of Rule 16b-3; and (b) that transactions of the type specified in the first paragraph of Rule 16b-3 by officers of the Company (whether or not they are directors) pursuant to the Plan will be exempt from the operation of Section 16(b) of the Act. In all cases, the terms, provisions, -3- conditions and limitations of the Plan shall be construed and interpreted consistent with the Company's intent as stated in this Section 1.8. 1.9 Recapitalization or Reorganization. If at any time or from time to time ---------------------------------- after the grant of any option hereunder there is a capital reorganization of the Common Stock, then the Optionee shall be entitled to receive upon the exercise of an option, in lieu of the Common Stock, the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon exercise of such option would have been entitled as a result of such capital reorganization. If the Company shall merge with another corporation and the Company is the surviving corporation in such merger and under the terms of such merger the Common Stock outstanding immediately prior to the merger remain outstanding and unchanged, any option granted hereunder shall continue to apply to the Common Stock thereto and shall also pertain and apply to any additional securities and other property, if any, to which a holder of the number of shares of Common Stock deliverable upon exercise of such option would have been entitled as a result of the merger. If (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, or (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), (each such event is referred to herein as a "Corporate Change"), then all options granted hereunder, including that portion not then otherwise vested, shall become exercisable in full effective immediately prior to the consummation of the Corporate Change, provided that the exercise of any such option that would not have been vested in the absence of the Corporate Change shall be conditioned upon the occurrence of the Corporate Change (i.e., so that if the Corporate Change does not subsequently occur, the unvested portion of the option shall vest according to its original terms), and provided further, however, in no event shall any incentive stock option, without the consent of the holder thereof, first become exercisable pursuant hereto if the result would be to cause such option, when granted, not to be treated as an incentive stock option (whether or not by reason of the possible future violation of the annual limitation set forth in Section 3.3.3 or otherwise). 1.10 Foreign Options and Rights. The Committee may grant options to -------------------------- Eligible Employees, Eligible Consultants and Non-Employee Directors who are subject to the tax laws of nations other than the United States, which options may have terms and conditions as determined by the Committee as necessary to comply with applicable foreign laws. The Committee may take any action which it deems advisable to obtain approval of any such option by the appropriate foreign governmental entity; provided, however, that no such option may be granted pursuant to this Section 1.10 and no action may be taken which would result in a violation of the Act, the Code or any other applicable law. 1.11 General Terms and Conditions of Options. Options granted under the --------------------------------------- Plan shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with law or the Article pursuant to which such option was granted, as the Committee shall deem desirable: 1.11.1 Manner of Exercise. In order to exercise all or a portion of ------------------ any option granted under the Plan, an Optionee shall deliver to the Company payment in full of the shares then being purchased, together with any required withholding tax. The payment of such exercise price and any required withholding tax shall either be in cash or, to the extent permitted by the applicable Stock Option Agreement, either (i) through delivery to the Company of shares of Common Stock, -4- (ii) by any combination of cash or shares, or (iii) pursuant to a "net exercise" provision, permitting exchange of the Option for shares subject to such Option. The value of each share of Common Stock delivered upon exercise shall be deemed to be equal to the per share price of the last sale of Common Stock on the trading day immediately preceding the date the option is exercised (or the closing bid if no sales were reported), based on the composite transactions in the Common Stock as reported in The Wall Street Journal (or any successor publication thereto). If the Committee so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to, or for resale in connection with, any distribution of such shares. An option agreement may, in the discretion of the Committee, provide for other methods to pay for, or otherwise exercise, an option. An option agreement also may, in the discretion of the Committee, provide for the withholding of Federal, state or local income tax upon exercise of an option from any cash or stock remuneration (from the Plan or otherwise) then or thereafter payable by the Company to the Optionee. To the extent provided by the terms of the applicable Stock Option Agreement, the Optionee may, at the discretion of the Committee, satisfy any mandatory federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under an option by any of the following means or by a combination of such means: (1) tendering cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionee as a result of the exercise or acquisition of stock under the option provided that such arrangement will not result in a charge to the Company's reported earnings in excess of that which the Company is willing to accept; or (3) delivering to the Company owned and unencumbered shares of the Common Stock of the Company that have been held for the greater of (i) six months, or (ii) the period required to avoid a charge to the Company's reported earnings in excess of that which the Company is willing to accept. The exercise of the option may be conditioned upon the receipt by the Company of satisfactory evidence of the Optionee's satisfaction of any withholding obligations. 1.11.2 Options not Transferable. No option granted under the Plan ------------------------ shall be transferable otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Optionee, such option shall be exercisable only by the Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any option granted under the Plan, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the option with respect to the shares involved in such attempt. 1.11.3 Adjustment of Shares. In the event that at any time after the -------------------- Effective Date the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares subject to the Plan (including shares as to which all outstanding options granted under the Plan, or portions thereof then unexercised, shall be exercisable), to the end that after such event the shares subject to the Plan and each Optionee's proportionate interest shall be maintained as if such Optionee had exercised the option before the occurrence of such event. Such adjustment in an outstanding option granted under the Plan shall be made without change in the total price applicable to such option or the unexercised portion of such option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in exercise price per share. Any such adjustment made by the Committee shall be final, conclusive and binding upon all Optionees, the Company, and all other interested persons. Any adjustment of an incentive stock option pursuant to this Section 1.11.3 -5- shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. 1.11.4 Listing and Registration of Shares. Each option granted under ---------------------------------- the Plan shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee. 1.11.5 Amendments. The Committee may, with the consent of the person ---------- or persons entitled to exercise any outstanding option granted under the Plan, amend such option; provided, however, that any such amendment shall be subject to shareholder approval when required in Section 1.4. The Committee may at any time or from time to time, in its discretion, in the case of any option previously granted under the Plan which is not then immediately exercisable in full, accelerate the time or times at which such option may be exercised to any earlier time or times. Any adjustment of an incentive stock option pursuant to this Section 1.11.5 shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. 1.11.6 Fair Market Value. The "fair market value" of the Company's ----------------- Common Stock (as referred to in Sections 2.2, 3.2 and 3.3.3 below), shall be determined by the Committee using any one of the following methods (as selected by the Committee in its discretion): (a) The fair market value shall be the last sale price, as reported on the Nasdaq National Market System, of the Company's Common Stock on the business day immediately preceding the date of grant. (b) For grants of options to persons who will first become Eligible Employees, Eligible Consultants or Non-Employee Directors at a date after the date the Committee or Board of Directors authorizes the grant of the Option, the fair market value shall be the last sale price, as reported on the Nasdaq National Market System, of the Company's Common Stock on the business day immediately preceding the date of hire (for Eligible Employees), date of engagement (for Eligible Consultants) or date of appointment to the Board of Directors (for Non Employee Directors). (c) The fair market value shall be average of the last sale prices, as reported on the Nasdaq National Market System, of the Company's Common Stock on the fifteen consecutive business days immediately preceding the date of grant. 1.11.7 Miscellaneous. ------------- (a) The person or persons entitled to exercise, or who have exercised, any option granted under the Plan shall not be entitled to any rights as a shareholder of the Company with respect to any shares subject to such option until such person shall have become the beneficial owner of such shares. -6- (b) No option granted under the Plan shall be construed as limiting any right which the Company or any subsidiary of the Company may have to terminate at any time, with or without cause, the employment of any person to whom such option has been granted. (c) Notwithstanding any provision of the Plan or the terms of any option granted under the Plan, the Company shall not be required to issue any shares hereunder or thereunder if such issuance would, in the judgment of the Committee, constitute a violation of any state or Federal law or of the rules or regulations of any governmental regulatory body, and the failure or refusal to issue shares under such circumstances shall not constitute a breach of contract or otherwise be actionable by the Optionee. (d) The Committee may require any person who exercises an incentive stock option to give prompt notice to the Company of any disposition of shares of Common Stock acquired upon exercise of an incentive stock option within one year after the transfer of shares to such person. 1.12 Maximum Grant. The maximum number of shares issuable under options ------------- granted in any single calendar year to any single Optionee shall be 1,000,000 shares. ARTICLE II NONQUALIFIED OPTIONS -------------------- 2.1 Eligible Employees. All Eligible Employees and Eligible Consultants ------------------ shall be eligible to receive nonqualified options under this Article II. 2.2 Calculation of Exercise Price. The exercise price to be paid for each ----------------------------- share of Common Stock deliverable upon exercise of each nonqualified option granted under Article II shall be determined by the Committee and may be more or less than, or equal to, the fair market value per share of Common Stock at the time of grant as determined by the Committee. The exercise price for each nonqualified option shall be subject to adjustment as provided in the Adjustment Provisions. 2.3 Terms and Conditions of Options. Nonqualified options granted under ------------------------------- this Article II shall be in such form as the Committee may from time to time approve, shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with this Article II, as the Committee shall deem desirable: 2.3.1 Option Period and Conditions and Limitations on Exercise. -------------------------------------------------------- Subject to Section 1.11.5, no nonqualified option shall be exercisable by an Eligible Employee or Eligible Consultant later than the date which is the date determined by the Committee upon the grant thereof (the "Nonqualified Option Expiration Date") which shall be no later than ten years after the date of grant. To the extent not prohibited by other provisions of the Plan, each nonqualified option granted to an Eligible Employee or Eligible Consultant shall be exercisable at such time or times as the Committee in its discretion may determine at or prior to the time such option is granted. In the event the Committee makes no such determination, each nonqualified option granted to an Eligible Employee or Eligible Consultant shall be exercisable from time to time, in whole or in part, at any time prior to the Nonqualified Option Expiration Date. 2.3.2 Termination of Employment or Relationship as Eligible Consultant; ----------------------------------------------------------------- Death. For purposes of this Article II and each nonqualified option granted ----- under this Article II, an Eligible -7- Employee's employment and a Eligible Consultant's relationship with the Company shall be deemed to have terminated at the close of business on the day preceding the first date on which such Eligible Employee or Eligible Consultant no longer for any reason whatsoever (including the death of such Eligible Employee or Eligible Consultant) is employed by, or has a relationship with, the Company or a subsidiary of the Company. An Eligible Employee shall be considered to be in the employment of the Company or a subsidiary of the Company as long as such Eligible Employee remains an employee of the Company or a subsidiary of the Company, whether active or on any authorized leave of absence. An Eligible Consultant shall be considered to have a relationship with the Company as long as such Eligible Consultant has an executory assignment from Company personnel authorized to make such an assignment. Any question as to whether and when there has been a termination of such employment or relationship, and the cause of such termination, shall be determined by the Committee and its determination shall be final and conclusive. If an Eligible Employee's employment or a Eligible Consultant's relationship is terminated for any reason whatsoever (including the death of such Eligible Employee or Eligible Consultant), each nonqualified option thereunto granted under this Article II and all rights thereunder shall wholly and completely terminate as follows: (a) With respect to nonqualified options not then exercisable, at the time the Eligible Employee's employment or a Eligible Consultant's relationship is terminated; and (b) With respect to nonqualified options then exercisable: (i) At the time the Eligible Employee's employment or a Eligible Consultant's relationship is terminated if the Eligible Employee's employment or the Consultant's relationship is terminated because such person has committed fraud, theft or embezzlement against the Company or a subsidiary, affiliated entity or customer of the Company, or for conflict of interest (other than legitimate competition); or (ii) At the expiration of a period of one year after the Eligible Employee's or Eligible Consultant's death (but in no event later than the Nonqualified Option Expiration Date) if the Eligible Employee's employment or Eligible Consultant's relationship is terminated by reason of such person's death. Any such nonqualified option may be exercised by the Eligible Employee's or Eligible Consultant's estate or by the person or persons who acquire the right to exercise such nonqualified option by bequest or inheritance; or (iii) At the expiration of a period of three years (but in no event later than the Nonqualified Option Expiration Date) after the Eligible Employee's employment is terminated because of retirement or the Eligible Employee's employment or the Eligible Consultant's relationship is terminated because of disability, if the Eligible Employee's employment has terminated because of retirement or disability or the Eligible Consultant's relationship has terminated because of disability; or (iv) At the expiration of a period of three months after the Eligible Employee's or Eligible Consultant's employment or relationship is terminated (but in no event later than the Nonqualified Option Expiration Date) if the Eligible Employee's employment or Eligible Consultant's relationship is terminated for any reason other than the reasons specified in Section 2.3.2(b)(i)- (iii). -8- ARTICLE III INCENTIVE STOCK OPTIONS ----------------------- 3.1 Eligible Employees. All Eligible Employees shall be eligible to receive ------------------ incentive stock options under this Article III. 3.2 Calculation of Exercise Price. The exercise price to be paid for each ----------------------------- share of Common Stock deliverable upon exercise of each incentive stock option granted hereunder shall be equal to the fair market value per share of Common Stock at the time of grant, as determined by the Committee pursuant to Section 1.11.6; provided, however, that in the case of an Eligible Employee who, at the time such incentive stock option is granted, owns more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary corporation, within the meaning of section 422(b)(6) of the Code (a "10% Eligible Employee"), the exercise price per share shall be at least 110% of the fair market value per share of Common Stock at the time of grant. The exercise price for each incentive stock option shall be subject to adjustment as provided in Section 1.11.5. 3.3 Term and Conditions of Options. Incentive stock options shall be in ------------------------------ such form as the Committee may from time to time approve, shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with this Article III, as the Committee shall deem desirable: 3.3.1 Option Period and Conditions and Limitations on Exercise. -------------------------------------------------------- Subject to Section 3.4, no incentive stock option shall be exercisable with respect to any of the shares subject to such incentive stock option later than the date which is the date determined by the Committee upon the grant thereof (the "ISO Expiration Date"), which shall be no later than ten years after the date of grant; provided, however, that in the case of any 10% Eligible Employee, the ISO Expiration Date of any incentive stock option granted thereto shall not be later than five years after the date of such grant. To the extent not prohibited by other provisions of the Plan, each incentive stock option shall be exercisable at such time or times as the Committee in its discretion may determine at or prior to the time such incentive stock option is granted. In the event the Committee makes no such determination, each incentive stock option shall be exercisable from time to time, in whole or in part, subject to the monetary limitations set forth in Section 3.3.3, at any time prior to the ISO Expiration Date. 3.3.2 Termination of Employment; Death. For purposes of this Article -------------------------------- III and each incentive stock option granted hereunder, an Eligible Employee's employment shall be deemed to have terminated at the close of business on the day preceding the first date on which such Eligible Employee is no longer for any reason whatsoever (including the death of such Eligible Employee) employed by the Company or a subsidiary of the Company. An Eligible Employee shall be considered to be in the employment of the Company or a subsidiary of the Company as long as such Eligible Employee remains an employee of the Company or a subsidiary of the Company, whether active or on any authorized leave of absence. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee and its determination shall be final and conclusive. If an Eligible Employee's employment is terminated for any reason whatsoever (including the death of such Eligible Employee), each incentive stock option thereunto granted hereunder and all rights thereunder shall wholly and completely terminate as follows: (a) With respect to incentive stock options not then exercisable, at the time the Eligible Employee's employment is terminated; and -9- (b) With respect to incentive stock options then exercisable: (i) At the time the Eligible Employee's employment is terminated if his employment is terminated because he is discharged for fraud, theft or embezzlement committed against the Company or a subsidiary, affiliated entity or customer of the Company, or for conflict of interest (other than legitimate competition); or (ii) At the expiration of a period of one year after the Eligible Employee's death (but in no event later than the ISO Expiration Date) if the Eligible Employee's employment is terminated by reason of his death. An incentive stock option granted under this Article III may be exercised by the Eligible Employee's estate or by the person or persons who acquire the right to exercise such incentive stock option by bequest or inheritance; or (iii) At the expiration of a period of three years (but in no event later than the ISO Expiration Date) after the Eligible Employee's employment is terminated if the Eligible Employee's employment has terminated because of retirement or disability ; or (iv) At the expiration of a period of three months after the Eligible Employee's employment is terminated (but in no event later than the ISO Expiration Date) if the Eligible Employee's employment is terminated for any reason other than the reasons specified in Section 3.3.2(b)(i)-(iii); provided, however, that the Committee. In the event and to the extent that an incentive stock option granted under this Article III is not exercised (i) within three months after the Eligible Employee's employment is terminated because of retirement or disability not within the meaning of section 22(e)(3) of the Code, or (ii) within one year after the Eligible Employee's employment is terminated because of disability within the meaning of section 22(e)(3) of the Code, such option shall be taxed as a nonqualified option. 3.3.3 Limitation on Amount. Notwithstanding any other provision of the -------------------- Plan, the aggregate fair market value (determined as of the time an incentive stock option is granted, based upon the calculation of the exercise price as provided in Sections 3.2 and 1.11.6) of the Common Stock with respect to which incentive stock options are exercisable for the first time by an Eligible Employee, under all incentive stock option plans of the Company and its subsidiaries, during any calendar year cannot exceed $100,000 or such other maximum amount permitted under Section 422(d) of the Code. If the date on which one or more of such incentive stock options could first be exercised would be accelerated pursuant to any provision of the Plan or any option agreement, and the acceleration of such exercise date would result in a violation of the monetary restriction set forth in the preceding sentence, then, notwithstanding any such provision, but subject to the provisions of the next succeeding sentence, the exercise dates of such incentive stock options shall be accelerated only to the date or dates, if any, that do not result in a violation of such restriction and, in such event the exercise date of the incentive stock options with the lowest option prices shall be accelerated to the earliest such dates. The Committee may, in its discretion, authorize the acceleration of the exercise date of one or more incentive stock options even if such acceleration would violate the monetary restriction set forth in the first sentence of this Section 3.3.3 and even if such incentive stock options were thereby converted in whole or in part to nonqualified options. -10- EX-27 5 FINANCIAL DATA SCHEDULE - ARTICLE 5
5 YEAR YEAR MAR-31-1998 MAR-31-1997 APR-01-1997 APR-01-1996 MAR-31-1998 MAR-31-1997 21,539,432 5,191,898 0 0 6,177,737 1,665,576 (1,224,845) (613,263) 4,482,698 3,284,632 33,504,018 10,303,161 1,778,423 780,945 0 0 47,708,420 21,079,336 14,487,231 2,776,901 0 0 0 0 0 0 93,086,669 36,860,205 (61,630,216) (20,611,495) 47,708,420 21,079,336 10,417,841 5,090,861 10,417,841 5,090,861 17,394,290 3,648,539 50,529,432 11,139,711 (1,347,304) (75,493) 0 0 0 0 (38,764,287) (5,973,357) 0 0 (38,764,287) (5,973,357) 0 0 0 0 0 0 (38,764,287) (5,973,357) (3.39) (1.02) (3.39) (1.02)
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